Innovation About to Overtake Regulation - Fuelled by Regulation

22 January 2019
Paul White

For several years, the narrative in financial technology has essentially argued, “The post-crisis period and its focus on heavy regulation is over. Enter Innovation.” That narrative was born of—and reinforced by—the fintech market heating up with venture capital, the idea that emerging tech could be borrowed from consumer banking and be simply repurposed into capital markets and institutional investment, and proclamations that old-guard companies (and technology) would be banished to the dustbin of history in short order. Implicit was a notion that during the first half of the 2010s, regulatory zeal had bogged down the pace of tech progress—and left the industry stale and behind its peers.

A new fashion emerged with a start-up, growth market ‘ring’. Various “-Tech” portmanteaus surfaced: RiskTech, InsureTech, and indeed RegTech entered the field of play with FinTech . Yet, despite these buzzy sounding terms, it’s still fair to say that the priorities were predominantly on fixing the age-old problems.

Hidden Credit

But just what has come of the latest innovation wave? As 2019 begins, we’re far enough into this cycle to assess it a little bit. For one thing, VC fintech investment has flattened off. Likewise, no major banking institution has fallen away due to the digital hawkishness from Silicon Valley. In fact, one could argue that many legacy institutions have moved with surprising briskness to learn and adopt innovation-based strategies, set up partnerships, and acquire IP and capabilities that can accelerate and defend their businesses.

That said, the impact of regulation demands far more attention ( and credit ) than it’s got in this transition—and one can see this influence from a variety of viewpoints.

One of those is incumbent protection: the highly-regulated environment governing finance may have  served to fend off the largest “FANG” tech giants outside the industry from launching in. Another is that bulkier regulatory regimes actually provided the impetus required for innovative technologies to flourish. That is particularly true of internal data transformation initiatives—like those required for the US Consolidated Audit Trail and MiFID II, among others.

The industry was also fairly active during this period, lobbying to catalyse trade processing automation and standardisation projects—progress that now underpins emerging technology possibilities like distributed ledger adoption. New fintech spaces, like regulator-backed incubators and sandboxes, continue healthy expansion because of new collaboration and trust between the parties.

Increased Convergence

Indeed, most banking operations chiefs—and increasingly, their colleagues on the buy side—tell us that preparing for the future of the enterprise begins with tightly-entwined assumptions about their compliance commitments, and how to deploy their data to turn those commitments into opportunities to derive value. These are now strategic considerations, well beyond shoehorning the latest fintech or riding the wave—instead, positing an interplay of innovation and regulation.

One of the reasons why is easy to spot: while many post-crisis regulations are now live, others are still just arriving, or evolving. That was highlighted earlier this year with GDPR. The new standard in privacy regulation showed both that massive new requirements can essentially come out of nowhere, catching firms off guard, and that the types of data in scope (and demonstrable actions around that data) are becoming far more diverse. Financial services companies have become more digitally-native, and their usage and stewardship of client data more complex and difficult to manage—and now, their progress in these areas is under the microscope. As with GDPR, more is also being asked of them internally as regulatory frameworks become more principles-based, rather than prescriptive. Greater effort is required to bring acceptable (and compliant) form to the regulatory ether.

Even in a more conventional context, regulatory oversight is getting more sophisticated—metricising and reporting not just trades but risk models, valuation adjustments, and legal entities across institutions, for instance—and is likely to focus far more upon trading algorithms behaviour and other decision-making artificial intelligence (AI) applications in coming years. More data scrutiny in these areas will lead to more potential exposure to enforcement actions. And to take it full circle, deep-learning AI applications are already being experimented with to game out and predict design and implementation of future regulation, itself.

The direction where all of this is going is clear—towards greater convergence of the rules and rule-makers, and innovative technology. 


With both of these historically-separate areas feeding off each other, firms will be rightly interested in laying the proper foundation for the future. It will look like a completely new juggling act. Of course, staying on top of the latest fintech developments will be important, and engagement with regulators has already demonstrated its value in recent years. But above all, new agility will be required of data. Stronger controls, especially around clients’ personal data, will only grow in importance as will analytical capabilities that can monitor internal decision-making and measure performance over time. It will be about tracking behaviours—and not just trades or portfolio management decisions.

As a result, innovation will no longer just involve dexterity for the next explosive blockchain-like concept, but rather be about width and depth: combining and integrating completely different types and sets of data—essentially, constructing and deconstructing data management on the fly—while bringing emerging technologies to bear at the same time.

Paul's original article can be found on FinExtra.