This may be controversial – due to the amount of extra work involved for both the RegTechs and the regulators – but is it time for RegTechs to be regulated? There is increasing confusion by financial institutions and regulators about the differences between FinTechs and RegTechs, and I now think the only way to resolve this and to create a level playing field is for RegTechs to be regulated.
FinTechs are founded to compete with traditional methods in the delivery of financial services and are therefore subject to the regulatory framework of where they operate. They are often given a period of time to try out their new product or service under an exemption whilst in some sort of regulatory sandbox environment before they need to apply for a full license. RegTechs, on the other hand, have not needed to be regulated as they are not competing with traditional methods of financial services or carrying out regulated activities. RegTechs are simply using technology to enhance the management of regulatory processes such as compliance, regulatory monitoring and reporting. Both FinTechs and traditional investment firms are subject to the regulatory framework they operate within – and both need RegTechs in order to increase efficiencies.
So why is there an issue? RegTechs are increasingly being asked during the sales process with financial institutions if they are regulated. The answer to this, as they are RegTechs, is always ‘no’. However, the confusion comes because they are often compared to a regulated FinTech who may also happen to offer some form of RegTech product as part of its core product suite – these FinTechs often license the product on a White Label basis from a RegTech to sell on to a financial institution. From the financial institution’s perspective, they are being sold a RegTech product from a regulated entity.
It sounds as if a simple explanation about the differences would suffice at this stage, but we are increasingly seeing this situation, and it puts pure RegTechs at a disadvantage during the procurement process. If a client thinks they have an option to onboard one provider who is regulated and one who isn’t, they will favour the regulated entity. This is detrimental to RegTech businesses, and it is not creating a level playing field.
Further, I am aware of many FinTechs who are offering RegTech solutions as their main product suite, which raises the question about how they became regulated in the first place, and whether that was part of their business plan objective in order to differentiate themselves from the competition. If it is the latter, one can see how this is blatantly unfair. Leaving the situation as it currently stands will simply become an opportunity for regulatory arbitrage, which is something we have witnessed in recent years in Europe and which ESMA has been taking steps to address in order to create some sort of harmonisation and ensure greater protection for investors.
In recent months I have taken part in a number of forums with different regulators and it has clearly been apparent that even they confuse RegTechs and FinTechs. The current situation is escalating, and it urgently needs addressing.
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There are a few solutions. Of course, it starts with educating the market, but this will take time. There is also the option to insist that firms offering both FinTechs and RegTechs create separate entities for the different services they offer – so that if they want to sell a Fintech solution, they can refer to the fact that it is regulated, but they need to make it clear that their RegTech solutions are not part of their regulated entity’s offering. Moreover, there is the option to introduce a regulatory framework for RegTechs.
It is worth noting that claims management companies in the UK have been regulated by the FCA since 2019. Claims management services consist of advice or services in respect of claims for compensation, restitution, repayment or any other remedy for loss or damage, or in respect of some other obligation. One can see the similarities between this and RegTechs that are in fact offering a service to financial institutions and assisting them in meeting their obligations towards the regulators whether in reporting, compliance or otherwise.
The responsibility to resolve the issues that I have highlighted lies with the regulators. They need to insist on more clarity between FinTechs and RegTechs. Regulators in Europe currently seem to have a lot of focus on regulating AI, which makes sense. However, it seems odd that there is likely to be a framework for AI before they look at a framework for RegTechs, especially because if RegTechs were to be regulated, AI could form part of the RegTech framework.
We want to work with the regulators to improve the current situation, to create greater transparency and fairness. If there is a regulatory framework for RegTechs then all parties would benefit – the RegTechs, the financial institutions and the regulators.
Remonda Kirketerp-Moller is the Founder and CEO of Muinmos