March 9

Simone di Castri / Matt Homer / Rosita Najmi / Kabir Kumar

RegTech for Regulators: Reimagining Financial Supervision and Policymaking

Imagine the following scenario: 

Filipino customers faced with issues while using financial services, file complaints about the providers or agents of those financial services via SMS, Viber or web portal, which then get processed automatically. Through a chatbot available on different channels and devices, the central bank learns from customers and provides redress via an automated complaints platform when service providers are unresponsive or fail to provide a satisfactory response. The chatbot escalates certain complaints to the central bank (Bangko Sentral ng Pilipinas or “BSP”) and redirects others to the financial providers, as appropriate. By automating complaints and reducing paperwork, financial authorities can now identify key risks earlier, better focus their supervisory efforts, and strengthen the analytical capacity of their staff to improve accountability and embed the customer’s voice in the policymaking process.

An automated, modern user interface is only one example of the possible applications of RegTech (regulatory technology) to financial supervision and policymaking. While the chatbot from the above scenario does not yet exist, it is no longer a distant reality. Technology is quickly enabling regulators to transform how they operate. Today, Filipino customers can only engage with the BSP via fax, phone, email or by visiting a BSP office. After receiving these complaints, BSP staff process and file everything manually, including the approximately 70 percent of complaints that are redirected to financial providers. This is often neither safe nor efficient. But tomorrow’s customers and financial authorities will be able to leverage technology to engage in a real-time, two-way conversation to quickly obtain information and resolve problems. This can hugely benefit consumers, regulators and financial institutions alike.


A market shift is afoot

The rapid growth of digital financial services innovation and the massive amount of data generated require us to rethink and modernize traditional regulatory and supervisory approaches. Moreover, the scope and complexity of financial authority mandates in emerging markets have critically expanded in the past two decades. In addition to their traditional mandate to preserve financial stability and maintain financial integrity, enhancing consumer protection and achieving financial inclusion have become higher priorities. Given their expanded mandate coupled with the imperative to enable ongoing innovation – whether by creating sandboxes for FinTech or building conducive regulatory frameworks for e-money – the need to focus on building financial authorities’ capacity is urgent.


Keeping pace with the data revolution

To better engage with changing markets and plan for growth given their resource constraints, financial authorities have worked to implement proportional, risk-based approaches (RBA) to both regulation and supervision.* However, embracing these new approaches has proven challenging for emerging-market financial authorities. These authorities need to become more effective at capturing and analyzing data to build an evidence base for informed and timely decision-making, targeted supervision and to decode innovation and understand consumers’ experience and needs.

Financial authorities need new tools for data collection and analysis to keep pace with market growth and innovation. These tools could help build the sector’s knowledge base, facilitate market oversight  and develop evidence to shape policies. Tools that help gather consumer-sourced data could provide deeper insight into consumer needs and highlight appropriate actions for financial authorities.


The next generation of tools and techniques

The RegTech for Regulators Accelerator (R2A) partners with leading financial sector authorities to pioneer the next generation of tools and techniques for market supervision and policy analysis. Financial marketplaces are quickly and increasingly becoming more complex, and R2A provides a structured approach to help regulators strengthen their capacities by accelerating their innovation capabilities.

Launched in October 2016, R2A is partnering with a select set of leading financial authorities in Ghana, Mexico and the Philippines to develop and test next-generation RegTech prototypes. R2A is developing a pipeline of proposed solutions and building relationships with innovators (software developers, tech startups, etc.) to design and test promising solutions.

We believe the future of financial supervision and policymaking lies in using technology and data to improve the speed, quality and comprehensiveness of information in support of targeted, risk-based decision-making. We also believe that R2A will enable financial authorities to reimagine how they operate, with a clear view toward cultivating the market for digital financial services while better addressing customer needs. 

* Proportional regulation is aimed at balancing risks and benefits against costs of regulation and supervision to the regulator, the supervisor and to the regulated and supervised institutions. For instance, over-regulation increases both supervisory and compliance costs, can discourage market entry and inhibit innovative business models from scaling, while under-regulation can threaten financial sector stability and integrity, and expose consumers to undue risk. Similarly, the risk-based approach (RBA) has been implemented to adopt supervisory measures that effectively mitigate the risks that are specific to individual products, channels, typologies of customers, financial institutions or sectors.


Simone di Castri is director of policy and ecosystem development at BFA; Matt Homer leads USAID’s digital finance team’s policy and partnerships activities as well as its financial inclusion investments in India; Rosita Najmi is a program officer at the Bill and Melinda Gates Foundation; and Kabir Kumar is director of policy and ecosystem building at Omidyar Network. 

Photo courtesy of Sam Azgor via Flickr

Finance, Technology
data, digital finance, financial inclusion, fintech, mobile finance