ESMA updates for fin-, reg- and suptech on trends, risks and vulnerabilites

Fintech continues to drive innovation in financial services, with potentially far-reaching consequences for both end-users and service providers, said ESMA in a recent report. Crypto Assets (CAs) and Initial Coin Offerings (ICOs) have been the focus point of attention recently because of the cash inflows that they have attracted.

Relevant developments are also taking place in relation to other applications of Distributed Ledger Technology (DLT) and Regulatory Technology (RegTech). ESMA’s product intervention measures, which imposed a prohibition on the marketing, distribution or sale of binary options to retail investors from 2 July 2018, and a restriction on the marketing, distribution or sale of Contracts for Difference (CFDs) from 1 August 2018, have recently been renewed.

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. However, with appropriate implementation and safeguards, regtech and suptech may help 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.

Read the full report

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