Trinity Of Big Data, RegTech, SupTech: Is It Panacea Or Problem For Financial Regulators? – Analysis

By Srinath Sridharan*

The global financial system has witnessed large-scale changes in the past decade. The significant variables of this have been huge data usage in the financial works and the growth of digital financial services, especially fintech. Financial markets also have become cross-border in nature, unlike in the past.

Data overload threatens to undermine the efforts of regulators and supervisors to fulfil their respective mandates. The larger responsibilities of financial regulators is to ensure financial stability, market governance, and ensure consumer protection. This creates the need for them to use technology tools, to ensure data-led risk-based supervision. The proliferation of Big Data, RegTech (Regulatory Technology), and SupTech (Supervisory Technology) has promised to revolutionise financial supervision, regulations, and policymaking, and enhance the resilience of the financial system. However, as with any emerging technology, there are divergent perspectives on whether these advancements are a panacea or a problem for the systemic financial resilience agenda.

Big Data, the massive and diverse volume of data generated every day, has the potential to revolutionise the way financial regulators and supervisors monitor and analyse the financial system. With the ability to process vast amounts of data in real time, Big Data can provide regulators and supervisors with unprecedented insights into market trends, risks, and potential vulnerabilities. This can enable them to detect and respond to emerging risks more quickly, making the financial system more resilient.

RegTech and SupTech, on the other hand, refer to the use of technology to streamline and automate regulatory compliance and supervision processes. RegTech solutions leverage Big Data to automate tasks such as reporting, risk assessment, and compliance monitoring, while SupTech solutions use advanced analytics and artificial intelligence to enhance supervisory processes such as data analysis, risk assessment, and regulatory reporting. These technologies can streamline compliance processes, automate reporting, and facilitate regulatory oversight, resulting in cost savings, efficiency gains, and improved compliance outcomes. RegTech solutions can help financial institutions stay compliant with complex regulations, such as Anti-Money Laundering (AML), Know Your Customer (KYC), and General Data Protection Regulation (GDPR), by leveraging data analytics, natural language processing, and other advanced technologies.

Emerging technologies also offer significant advantages to global markets. Big Data, RegTech, and SupTech can enhance market surveillance, risk assessment, and market integrity, which can contribute to increased investor confidence and trust. These technologies can also facilitate cross-border data sharing and interoperability, enabling regulators and policymakers to collaborate globally on regulatory initiatives and foster international financial stability.

Moreover, financial policymakers see the potential of Big Data, RegTech, and SupTech in shaping regulatory policies and frameworks. These technologies can provide policymakers with real-time insights, evidence-based decision-making, and predictive analytics to inform regulatory strategies and design effective policies. Policymakers can leverage these technologies to assess the impact of regulations, identify potential risks and vulnerabilities, and proactively address systemic issues. They see these technologies as valuable tools for identifying, monitoring, and mitigating systemic risks that can arise from complex and interconnected financial systems.

However, there are also concerns about the potential downsides of Big Data, RegTech, and SupTech. One concern is the reliance on data quality and data privacy. As financial institutions and regulators increasingly rely on large amounts of data, there are concerns about data accuracy, reliability, and privacy. Data breaches, cyber threats, and unauthorised access to sensitive data can pose significant risks to the financial system and can undermine public trust.

Another issue is the potential for regulatory arbitrage and technological disruption. As financial institutions adopt RegTech and SupTech solutions, there is a risk that regulatory requirements may be interpreted and implemented differently across jurisdictions, leading to regulatory arbitrage and inconsistencies. Moreover, the rapid pace of technological advancements may disrupt traditional financial services business models, potentially leading to job losses, market concentration, and systemic risks.

Furthermore, there are further worries about the digital divide and the potential exclusion of smaller financial institutions and emerging economies. Not all financial institutions may have the resources or expertise to adopt and implement Big Data, RegTech, and SupTech solutions, leading to an uneven playing field and potential concentration of market power among larger players. Emerging economies may face challenges in adopting and adapting to these technologies, potentially exacerbating the digital divide and widening inequalities in the global financial system.

Moreover, the weaponisation of finance is another growing concern. As financial institutions and regulators rely on Big Data, RegTech, and SupTech to detect and mitigate risks, there is a risk of these technologies being exploited for malicious purposes. For example, cybercriminals may exploit vulnerabilities in data analytics and machine learning algorithms to manipulate financial data, disrupt financial systems, or engage in financial fraud. Additionally, the weaponisation of finance for political purposes, such as economic sanctions or financial warfare, can have severe repercussions on global financial stability and market integrity. The convergence of Big Data, RegTech, and SupTech with the complexities of the VUCA world and the potential weaponisation of finance requires a cautious approach. It calls for robust data governance, data privacy protection, and cybersecurity measures to safeguard against data breaches, cyber threats, and malicious activities. It also necessitates continuous monitoring, evaluation, and adaptation of regulatory and policy frameworks to keep pace with the evolving financial landscape and emerging risks. Furthermore, it requires a balanced approach to ensure that these technologies are not monopolised by a few players or nations.

The global nature of financial markets means that risks can quickly spread across jurisdictions, potentially amplifying their impact. As such, global financial regulators have been working on enhancing coordination and cooperation among jurisdictions to foster consistent regulatory standards and address cross-border risks. This includes efforts to harmonise regulations, share information, and coordinate supervisory activities to prevent regulatory arbitrage and promote a level playing field for financial institutions operating across borders. Another area of global cooperation amongst financial regulators is the development of common standards and guidelines for the use of Big Data, RegTech, and SupTech in systemic financial resilience efforts. Standardisation can help ensure consistency in the application of these technologies, facilitate interoperability, and promote transparency and accountability. International organisations, such as the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO), are actively engaged in coordinating efforts among regulators globally to develop common principles and guidelines for the responsible use of these technologies. As Big Data often involves the use of data from multiple jurisdictions, regulators need to collaborate on data-sharing frameworks that comply with relevant data protection and privacy regulations. This requires coordination and alignment of data governance policies and practices among regulators to enable effective cross-border data flows while protecting data privacy and security.

Big Data, RegTech, and SupTech offer significant opportunities for enhancing systemic financial resilience and improving financial supervision, regulations, policy making, and global market stability. On the surface, these technological innovations seem like a silver bullet for addressing regulatory challenges and enhancing systemic financial resilience. However, the concerns of data quality, privacy, regulatory arbitrage, technological disruption, and inclusiveness will need global cooperation.

*About the author: Srinath Sridharan is Visiting Fellow at ORF. He has been a strategic counsel for 24 years across diverse sectors, including automobile, e-commerce, advertising and financial services. He has led multiple cross-functional leadership teams across industry projects.

SourceL This article was published by Observer Research Foundation