There are significant RegTech opportunities for governments.
Concern around the time, cost, and complexity of compliance regimes across government has led to a growing interest in Regulatory technology (RegTech). These digital tools can provide government agencies with the means to more effectively and efficiently manage their regulatory compliance functions.
RegTech is a shift from ‘reactive’ to ‘dynamic’ regulation and a (regulatory) function that can rapidly adjust to the compliance context.
RegTech is frequently conflated with FinTech (Financial Technology) or considered a subset (of FinTech). While RegTech is frequently discussed within the financial sector, and may be used within FinTech, it is its own category and has wider applications.
Defining RegTech
The Institute of International Finance (2015) defines RegTech as ‘the use of technologies to solve regulatory and compliance requirements more effectively and efficiently’. Arner et al (2017) explains this as 'monitoring, reporting, and compliance’', and the Productivity Commission (2020) further emphasizes the improved 'targeting of regulation... and reducing the costs of administration and compliance'.
Most definitions of RegTech emerged from the financial sector and likely had in mind the regulatory issues and entities focused in this area. Frequently, RegTech is noted as supporting an institution such as a bank to comply with regulations.
Wider scanning of literature on RegTech shows its generic purpose to be focused on compliance management, risk management, regulatory reporting, industry regulation, transaction monitoring, identity management and control, and fraud detection.
Fundamentally...RegTech is about using technology to support regulation...
Key areas where Regtech solutions may be beneficial:
where regulatory environments are complex to navigate and monitor
where there are numerous regulations and/standards
if the regulation and/or standards change frequently
where the costs of compliance are high
where there are precise requirements and possibly time sensitivety
where there is scope to improve risk-based regulatory approaches to be more targeted
where technology can enable better monitoring and overcome constraints (such as physical presence requirements)
where emerging technology could allow for the use of data for predictive analytics and real time monitoring
in 'quick win' low-tech solutions where digitised data, forms, registers and transactions which could reduce compliance costs
where increased transparency between market participants and regulators would be helpful.
Creating an environment that supports RegTech
There are a number of conditions that support building successful RegTech applications. These are similar to the considerations government agencies would routinely consider with any new technology projects and include:
Clarity of purpose (the regulatory outcome). The purpose for the RegTech application needs to support the compliance outcomes sought. This will require sound understanding and expertise of the existing and new regulatory frameworks and requirements. Regulatory experts will need to be closely consulted during the development and running of the RegTech solutions to see how well it aligns with existing and evolving regulations.
Cost-Effectiveness. RegTech applications should provide cost-effective solutions for the regulator and the user. This is will justify the use of the RegTech application and will be achieved through the replacement of manual processes.
Automation . A key objective of RegTech is the automation of regulatory processes, to improve efficiency. This streamlining should reduce the time, cost and resources related to the compliance activity by reducing manual processes.
User-friendly. RegTech applications should be user friendly, easily managed by the regulator and accessible to the end user.
Technological integration: RegTech should be compliementary to existing systems and technologies and need to integrate seamlessly to support their use.
Data management . Sound data management is central to RegTech and applications need to be secure and support appropriate handling of sensitive data. RegTech tools need to adhere to data protection and security and privacy regulations.
Scalability. RegTech solutions should be built to be scalable to the evolving use case of the organisation and compliance outcomes that it is supporting. This scalability could pertain to the volume of users and data.
Adaptability. Good RegTech applications should be adaptable to the dynamism of the regulatory environment and have the capability to make regular updates when their are changes.
Analytics. RegTech applications should support the generation helpful analytics that can generate reporting such as dashboards. These features should also support the reduction of manual oversight processes for the regulator.
Collaboration. Where interoperability is possible, collaboration with other regulatory authorities can be beneficial to allow efficient end to end compliance processes.
Cybersecurity. RegTech applications are likley to hold sensitive data and access to critical digital infrastructure that requires cybersecurity practices.
The variety of government regulatory areas where RegTech could be applied
RegTech can be applied in an endless variety of regulatory scenarios. The following is a snapshot of a few different government regulatory areas where RegTech could be applied and highlights the value of taking a broad view.
Business regulation: Government entities overseeing business activities can utilize RegTech for streamlined business registrations, license issuance, and compliance monitoring. Automated workflows can expedite approvals, and compliance checks can be automated to ensure that businesses adhere to regulatory requirements.
Audit and financial regulation: Regulatory bodies responsible for financial oversight can leverage RegTech to enhance audit processes. Automated audit trails, data analytics, and machine learning algorithms can improve the detection of fraudulent activities, ensuring a more robust and proactive approach to financial regulation.
Human resources: Government departments managing human resources can use RegTech in routine tasks such as employee onboarding, compliance with legislation, training, recruitment, and workforce analytics.
Land use and planning: RegTech can streamline land-use applications, zoning compliance, and building permits. Automated systems can facilitate faster approvals, reduce paperwork, and ensure that development projects align with environmental and land-use regulations.
Agriculture: Government agencies overseeing agriculture can employ RegTech for monitoring, compliance with environmental regulations, and supply chain traceability. Internet of Things (IoT) technology, sensors, and satelite imagery can be used to collect data and monitor compliance with enviornmental regulations within the agricultural sector.
Transportation: RegTech can improve regulatory activities in transportation, including vehicle registration, licensing, and compliance monitoring. Automated systems could streamline safety inspections and ensure that transportation services meet regulatory standards.
Government identities: RegTech can enhance identity verification processes, secure government databases, and prevent identity fraud. Biometric authentication and blockchain technologies can be employed to strengthen the security of government identity systems.
Education: RegTech can assist in accreditation processes, student record management, and compliance with educational standards. Automated systems can ensure that educational institutions adhere to regulatory requirements.
Fire Safety: Government agencies responsible for fire safety regulations can use RegTech for building inspections, fire code compliance, and emergency response planning. Automation can improve the efficiency of fire safety assessments and allow 'real time' monitoring of regulations.
Taxation: RegTech can revolutionize tax compliance by automating data analysis to identify potential tax evasion, ensuring accurate reporting, and simplifying the filing process for businesses and individuals. Automated systems can also facilitate real-time monitoring of transactions and financial activities, reducing the risk of tax fraud.
Anti-Money Laundering-Countering Financing of Terrorism (AML/CFT) RegTech solutions could help governments in implementing and managing AML/CFT oversight by verify identities, tracking financial transactions, and ensuring compliance with regulations.
Government cybersecurity : RegTech could bolster government cybersecurity by providing tools and technologies to monitor compliance levels against local and/or international information security standards. This assurance could cover core government agencies and then be broadened to critical national infrastructure.
Keeping up to date with international standards. RegTech could be used to automate information and process updates to locally adminstered standards following updates in international standards.
Regulatory change management: Governments can utilize RegTech solutions to stay up to date across regulatory changes, manage updates, and ensure that relevant stakeholders are informed and compliant with the latest regulations.
Why has there been slow update of RegTech by government?
Key reasons for the slow uptake of RegTech by governments has included:
RegTech not being seen as a high priority by the government regulator
Inadequate digital capacity and capability within the government agency or market
Funding challenges for RegTech projects
RegTech seen as 'gimmicky' and not related to core regulatory business
Lack of awareness of technology that can be applied with RegTech
Concerns around the reliability of the application
Concerns around the security and privacy of the data by the regulator and/or the user
Conclusion
RegTech is an emerging area that governments should consider as part of a broad suite of initiatives to digitally transform government services. The range of applications for RegTech are endless and will be at the forefront of ongoing efforts to change the way government regulatory functions work and add value.
References
Becker, Michael; Merz, Kevin; Buchkremer, Rüdiger (2020). RegTech—the application of modern information technology in regulatory affairs: areas of interest in research and practice. Intelligence systems in Accounting and Finance. Volume27, Issue4 October/December 2020
Pages 161-16
Colaert, V. (2018). RegTech as a response to regulatory expansion in the financial sector. Available at SSRN 2677116.
Mitzi Bolton & Michael Mintrom(2023)RegTech and creating public value: opportunities and challenges,Policy Design and Practice,6:3,266-282,DOI: 10.1080/25741292.2023.2213059
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