ESMA: reg- and suptech will change compliance and market relationships

Regulatory and supervisory technologies are developing in response to various demand and supply drivers. On the demand side, regulatory pressure and budget limitations are pushing the market towards an increased use of automated software to replace human decision-making activities. This trend is reinforced by supply drivers such as increasing computing capacity and improved data architecture.

Market participants are increasingly using new automated tools in areas such as fraud detection, regulatory reporting and risk management, while potential applications of new tools for regulators include greater surveillance capacity and improved data collection and management. With these new tools come challenges and risks, notably operational risk.

Just as fintech is introducing changes to the way in which market participants offer their services, so too will regtech and suptech alter the way in which financial institutions and regulators, respectively, comply with the rules and supervise markets. In so doing, these technologies have the potential to reshape the relationship between regulators and market participants.

For example, technologies such as APIs are facilitating more efficient filing of regulatory data by market participants, while regulators are looking to develop artificial intelligence and machine learning tools to enhance their market surveillance and to improve their capacity for fraud detection.

Inevitably, new technological abilities bring with them new challenges and new sources of risk, notably including operational risk. Nonetheless, provided they are implemented correctly and monitored effectively, regtech and suptech tools have the potential to improve a financial institution’s ability to meet regulatory demands in a cost-efficient manner and help regulators to analyze increasingly large and complex datasets.

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