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Tom Curry
The world of innovative financial technology has its own jargon. “Fintech” is the best-known term. It generally refers to digital innovations in financial products and services. In the arcane world of financial regulation and supervision, there are also the lesser-known but important terms of “regtech” and “suptech.” These terms refer to emerging areas of financial technological innovation. United States and global bank supervisors are increasingly looking at regtech and suptech solutions for better industry compliance and better regulatory outcomes.
What do these terms mean and why do they matter? The Bank for International Settlements (BIS), the global central bank for central banks, defines regtech to mean “applications of innovative technologies that support compliance with regulatory and reporting requirements by regulated financial institutions.” The BIS defines suptech as “the use of innovative technology by supervisory agencies to support supervision.” More specifically, suptech “helps supervisory agencies to digitise reporting and regulatory processes, resulting in more efficient and proactive monitoring of risk and compliance at financial institutions.”
Kate Henry
The key difference between regtech and suptech is that regtech aims to streamline regulatory reporting for financial institutions while suptech focuses on facilitating the supervision of financial institutions by government agencies.
The global financial crisis in 2008 revealed significant weaknesses in the largest banks’ internal and regulatory reporting systems. Post-crisis, financial regulators placed a renewed emphasis on improving the integrity and capabilities of large banks’ information management and reporting systems. In response, some banks embraced regtech to more efficiently collect and report information to financial regulators.
Blake C. Tyler
What Are Regtech and Suptech?
Regtech has since advanced exponentially as the banking industry seeks to reduce the cost and achieve better compliance outcomes in meeting numerous complex regulatory monitoring and reporting requirements. Cloud computing capabilities and advances in artificial intelligence and machine learning have helped expedite regtech’s growth. Past breakdowns in monitoring and reporting have been costly in terms of financial impact, reputational damage, enforcement actions, and civil money penalties. For example, AI and machine learning have made significant strides in improved Bank Secrecy Act/anti-money laundering (BSA/AML) risk identification, transaction monitoring and suspicious activity reporting. Another promising area is fraud detection, particularly synthetic fraud. Regtech permits vast amounts of data to be stored and reviewed quickly without the risk of human error.
United States law enforcement agencies and federal bank supervisors are increasingly open to industry use of regtech solutions in financial crime compliance regimes. For example, in December 2018, the U.S. Financial Crimes Enforcement Network and the federal banking agencies issued a joint policy statement broadly supporting the development and use of innovative AI and machine-based technologies and pilots to improve the effectiveness of BSA/AML compliance programs.
Suptech seeks to leverage advances in data collection and analytics to supplement and inform risk-based supervision and to a lesser extent reduce costs to bank supervisors. The BIS cited the benefits of enhanced effectiveness, reduced costs, and increased capabilities as reasons for bank supervisors to use or explore suptech solutions. Perhaps the most important potential benefit of a mature suptech program is the ability of regulators to move to real time rather than point in time supervision.
Hurdles Remain
In the United States, the largest hurdle to adapting new technology for regulatory compliance and supervision has been overcoming the overlapping mandates and data collection and reporting requirements of our complex regulatory system and the lack of collaboration among financial regulatory agencies.
A whitepaper published on Jan. 23 by the Alliance for Innovative Regulation, a regtech nonprofit, cites a number of structural impediments to the development and adoption of regtech solutions. They include statutory rulemaking and budgetary limitations, federal procurement requirements, personnel and hiring policies, and resistant agency cultures.
That is not to say that there has not been an embrace of innovation at individual agencies. A good example is the FDIC’s June 30 proposal to sponsor a “tech sprint” competition among 20 data and technology firms to develop a new and innovative approach to the current quarterly call reports that FDIC-insured banks, including 3,200 community banks, are required to file. The data and technology firms invited to compete are leaders in the financial services, data management, data analytics and AI/machine learning fields.
This is a significant step by the FDIC toward embracing the potential efficiencies of technology as an alternative to legacy reporting practices. The FDIC’s purpose in launching the tech competition is to leverage “[t]hese modern tools,” noting further that “lessons learned in future competitions . . . will help make financial reporting seamless and less burdensome for banks, provide more timely and granular data to the FDIC on industry health, and promote more efficient supervision of individual banks.” This emphasis on more meaningful, real time data and reducing the burden on smaller financial institutions has the potential for improved regulatory oversight and simplified reporting requirements.
In the months ahead, we can expect more strides in regtech and suptech in the United States and globally due to the clear benefits of improved regulatory impacts and reduced industry and agency costs.
Thomas J. Curry is a partner in Nutter’s corporate and transactions department and a member of the board of directors of the Alliance for Innovative Regulation. Kate Henry and Blake C. Tyler are associates in Nutter’s corporate and transactions department. Curry is former U.S. comptroller of the currency and all are members of the firm’s banking and financial services group.
