The Path Ahead: Challenges for RegTech Innovation
Our learnings in TestLab 2022 underscored the importance of an ecosystem approach to promote RegTech innovation and increase adoption of beneficial RegTech solutions.
Solution providers, regulators, and capital market participants all play critical roles in shaping the future of the RegTech innovation ecosystem.
The OSC’s mandate is to protect investors from unfair, improper, or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic risk.
To drive innovation and improve outcomes for all stakeholders, it is important that we understand the unique motivations, responsibilities, and challenges of each group. In doing so, we can work towards more productive, efficient, and robust capital markets for all.
In TestLab 2022, we observed barriers to adoption and development difficulties that RegTech innovators of all sizes often face, including challenges building collaborative relationships with registrants, monitoring regulatory changes, and ensuring that registrants understand their solutions.
Calls to Action for Innovators, Market Participants, and Regulators
Challenge 1: Collaboration with Market Participants
RegTech solution providers face a complex and fragmented environment with a variety of stakeholders - regulators, registrants, and investors - all of whom have different goals and points of view.
Our conversations with test participants highlighted the need for consistent collaboration between regulators, RegTech solution providers, and capital markets participants during the RegTech design and development process. This includes market research, user testing, and community building efforts to design efficient and responsive solutions that meet registrants’ needs.
Most of the test participants experienced issues in testing and data collection due to frictions at the test partner level, and those experiences echoed the normal development hurdles experienced by these firms.
Low engagement from registrants for testing impacted the testing process and limited the scope of the data collected.
Two test participants had registered firms confirmed as test partners that both backed out prior to testing. Other test participants simply had fewer advisors complete the testing process, or sharing feedback, than expected based on initial commitments.
These challenges faced during TestLab 2022 were not based on size or stage of the firm and varied across test participants.
Moving beyond TestLab 2022, active engagement and collaboration between RegTech solution providers and registrants is essential to support a stakeholder-led development process that delivers solutions that help Ontario’s registrants benefit from new technologies and meet the evolving needs of their clients.
Challenge 2: Explainable and Interpretable Solutions
In TestLab 2022, we saw that RegTech solutions can range in complexity from simple automation to artificial intelligence, have data inputs ranging from a single client to multiple overlapping external data providers, or be backed by a RegTech solution provider’s industry expertise right through to peer-reviewed academic studies.
As technology solutions become more sophisticated and comprehensive, registrants need to understand how RegTech solutions are producing actionable outputs, especially in subjective areas typically determined by registrant expertise and experience, such as suitability and investment recommendations.
A registrant’s understanding of how and how well a RegTech solution may aid the fulfillment of their regulatory requirements is key, but the variety across RegTech solution providers, and the complexity of the underlying technologies, means that registrants must make a concerted effort to understand any given solution that they intend to implement and rely on. The challenge is for RegTech solution providers to explain their solutions in such a way to make this process simple and smooth for registrants.
During TestLab 2022, we saw that there was no standard method used to share this information with registrants:
All the test participants conduct live demonstrations or offer temporary accounts that provide registrants with a real-world view and experience with the solution.
Four test participants share comprehensive technical documentation detailing how their solution’s technology works or how its methodology is backed by science or leading practices.
Two test participants offer user-support guides and how-to materials, such as informational pop-ups outlining the meaning of terms or the basis for a calculated data point, to dedicated sections with informational articles relevant to the solution.
It is important for RegTech solution providers to be transparent by making solutions explainable and interpretable in order to create trust in their solutions. They need to offer plain and clear explanations so that registrants fully understand a solution’s capabilities and limitations, including around data sources, methodology, biases, privacy, cybersecurity, and beyond.
Challenge 3: Accessible Regulation
The common goal of RegTech solution providers is to help their customers operate in regulated sectors. The issue then lies in the development of RegTech solutions that are reliably responsive to the regulatory framework in the local jurisdiction of its customers.
As a result, RegTech solution providers need to both know the world of the regulations, but also the context and varied interpretation of those regulations, and then monitor for regulatory changes that may impact the solution and the firm’s customers. These challenges are amplified when a firm operates internationally or wants to offer its RegTech solution in multiple jurisdictions.
Vantage Point: Innovator Perspectives on Challenges in the Regtech Ecosystem
We’ve heard insights from test participants about the challenges they face, including the need for more engagement and communication between RegTech firms, registrants, and regulators, the difficulties of building sufficient regulatory knowledge to develop responsive RegTech solutions, and the hurdle they face in ensuring registrants can understand their solutions enough to adopt them.
Multiple test participants shared that they have seen a noticeable mindset shift in the RegTech space recently – they are partnering with each other more than ever before, realizing that they can’t offer all the tools needed by industry. We have heard that collaboration benefits everyone involved, from partnering firms to registrants and clients, but the collaboration required for better innovation and RegTech solutions goes beyond partnerships between RegTech firms and includes regulators, such as the OSC, and capital markets participants themselves.
We also heard from multiple test participants that regulators’ efforts should focus on regulatory information sharing and promoting collaboration across the innovation ecosystem.
Several test participants suggested that regulators could help RegTech by making our regulatory framework easier to understand and navigate, which would greatly help the industry. One test participant, a multinational RegTech solution provider, sees keeping up with regulatory developments as crucial – but it struggles to automate and integrate regular updates from regulators with its solution.
Improving the overall understanding and increasing engagement among all members of the RegTech ecosystem would benefit all stakeholders and contribute to the overall success of Ontario’s capital markets.