How regtech is changing regulation and compliance

Posted by on 12/04/2017

While its vision remained the same, the way in which the Australian Securities and Investments Commission (ASIC) was approaching regulation was transforming, thanks to advancements in regulatory technology or ‘regtech’, according to ASIC’s chairman Greg Medcraft.

Opening the ASIC Annual Forum in Sydney in March, Medcraft observed: ‘The way we monitor and regulate is increasingly data-driven. Regtech offers us the opportunity to better detect, understand and respond to misconduct. Through increasing access to data and more sophisticated analytic tools, we can be more proactive and pre-emptive in understanding and addressing the risks we see.’

He added that regtech was empowering businesses to better train their staff and manage their compliance risks. It was also improving confidence in risk management in businesses where significant liability could arise from non-compliance.

Medcraft explained how regtech could help promote a good culture in financial services firms, turning compliance staff into coaches and educators, rather than policemen.

‘Business models such as Red Marker not only detect misconduct, but they also educate when they detect possible issues,’ he said.

‘Efficiency gains from regtech means staff dedicated to compliance in firms could have an expanded education focus. These teams could focus on understanding and shaping firm culture.’

Medcraft detailed a host of ways in which ASIC was embracing technology to improve its own effectiveness, noting that the regulator was also creating data labs and examining the potential for using artificial intelligence (AI). And it now had a chief data officer and a Data Governance Council.

While technologies such as AI, blockchain, fintech and regtech offered many benefits, Medcraft cautioned that they also came with potential risks such as the misuse of data, cyber-attacks and new channels though which to perpetrate fraud.

He added that it was vital that we did not neglect the issue of accountability as we moved into ever-increasing automation and machine-based decision making.

‘For any algorithmic system, there needs to be a person who is responsible for its design – and its outcomes,’ he said.

‘Automated decisions must be able to be meaningfully explained to customers, to the regulator and to any other interested stakeholders.

‘If and when algorithms make mistakes — whether because of data errors in their inputs or because of issues with their design — there need to be avenues for redress. We cannot use technology platforms to simply shift risk to the consumer.’

‘As we see the potential of automated financial services, and AI playing a role, we need to look to the algorithms behind these services. These algorithms will need to be transparent so their decisions can be challenged, and not just be considered opaque ‘black boxes’.’

Medcraft also noted that distributed ledger technology — or blockchain — was being fast embraced. ‘This year will be a critical year for distributed ledger technology in financial services, as we move from talking about this technology to implementing and testing its abilities to create new efficiencies in the system.’

ASIC has published an information sheet to help those implementing and testing this technology.

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