Insight: Competition in the RegTech Ecosystem

The OSC’s mandate was recently expanded to include fostering “fair, efficient, and competitive capital markets.” As the OSC Innovation Office, we recognize the role of innovation as a powerful driver of competition and consumer choice, and the critical role it will play in Ontario’s long-term growth.

According to Canada’s Competition Bureau, “competition drives our economy, helps Canada realize its full economic potential, and benefits consumers.” Through TestLab, we saw how RegTech can drive growth and competition for registrants, while also creating new opportunities for RegTech firms.

We asked test participants for their perspectives on the competitive landscape for their firms and customers. We heard that smart competition is critical for their success. This includes strategic partnerships and collaborations with competitors to serve market demands where it makes sense, rising to the challenge of differentiating solutions in increasingly saturated markets, and, at times, choosing not to compete for certain business if the economic and operational realities do not align with their goals.

Test participants also shared their challenges in marketing solutions that may not always be seen as revenue generating, even though they can enhance efficiency and add value to the advisor-client relationship, a win-win for registrants and their clients. We also heard about the importance of being able to access reliable data, which poses both challenges and opportunities for RegTech providers.

Vantage Point: TestLab 2022 Highlights

RegTech can Foster Competition that Benefits Registrants and their Clients

Our outreach survey showed us that investors want to see improvements in the end-to-end investment experience, from better access to product and portfolio information to reducing friction in account administration tasks like onboarding, communications, and fund transfers.

At the same time, the survey indicated that the number one registrant priority is client acquisition and retention. This appears to present an opportunity for registered firms and advisors to consider how RegTech solutions can help them effectively engage the clients they seek to attract and retain.

Registrants know their own business needs best and can focus their RegTech adoption efforts where they will be the most impactful.

When selecting test participants, we noted that multiple RegTech solution providers developed solutions that addressed the same market needs, sometimes in similar or very different ways. Registrants can choose between available solutions by coverage and features, cost, interoperability with their existing internal systems, and other factors to ultimately select the best solution for their needs.

For instance, client onboarding and KYC solutions may offer comparable features and seek to solve similar registrant pain points in a customizable, easy-to-use manner that engages clients in the KYC process, distinguishing themselves from competitors that still rely on manual or time-intensive methods.

Opportunities may also exist for services and platforms to offer RegTech solutions for educational purposes to self-directed investors. Integrating investor-focused solutions through Application Programming Interfaces (APIs) could support self-directed investors by giving them direct access to market information, securities analytics, and portfolio creation and monitoring tools. At least one test participant has partnered with online brokerages to offer educational and planning supports to investors. Investors could use those tools to design and efficiently maintain investment portfolios that are better aligned with their objectives.

RegTech can Reduce Barriers to Entry

We heard from multiple test participants that newer entrants and Registrants with more adaptable systems may be better positioned to take advantage of cutting-edge solutions that meet the evolving needs of the firm and their growing client base, as they are less likely to have interoperability requirements for their own systems to integrate with new solutions. In contrast, firms with information housed in stand-alone databases or proprietary software that does not support data migration or connections to a newer platform, may find it difficult to integrate their existing systems with new RegTech solutions.

Finding and implementing innovative RegTech solutions is a clear goal for Gillian Kunza, the CEO of Designed Wealth Management (DWM), a securities dealer founded in 2021.

Kunza told us how DWM’s experience as a test partner in TestLab aligned well with its technology-forward stance:

In today’s world, we have to be prepared to accommodate multiple perspectives with speed and accuracy.

RegTech, in our experience with TestLab, considers and incorporates the perspectives of clients, advisors, head offices, back offices, regulators, and technology partners. Adopting new technology enables us to consider multiple perspectives early and helps to avoid miscommunications and administrative work down the line in a major way.

The adoption of RegTech solutions also has the potential to reduce barriers to entry for new registrants by making compliance with KYC and KYP regulations, a core operational requirement, more affordable and less burdensome. New registrants implementing RegTech solutions into their workflow could benefit by setting up their processes and procedures more quickly and efficiently.

Test participants shared their views on how RegTech solutions could aid registrants in their client acquisition efforts to support their growth as a new firm. One test participant noted that they have seen their solution successfully used for client prospecting and acquisition as it helps advisors to quickly forge an understanding of the client. Similarly, another test participant pointed out that their solution can reduce administrative pain points by making it easier to switch to a newer registrant in search of better services or fees.

Access to Reliable Data Presents an Opportunity and Challenge

Ontario’s capital markets produce a plethora of data: market and trading data, financial and other continuous disclosure documents, and current news and media reports. Registrants increasingly want innovative solutions that enable them to ingest, track, and analyze investment data continuously, while also supporting them in meeting KYP-related regulatory requirements.

However, many technology firms rely on multiple external market and trading data feeds to ensure a robust foundation for their solution. We heard from some of the test participants that obtaining quality data coverage can be one of the biggest pain points due to the high costs of available sources, but that obtaining comprehensive data can also be a major differentiator from their competitors.

The reliability and integrity of external data sources is crucial to developing effective RegTech solutions for market participants. Where data conflicts, or is simply not available, solution providers need to ensure that registrants and investors using the solution for decision-making understand data coverage and gaps.

Firms with a long-standing presence in the market may be better able to leverage existing data, or relationships with data providers, to access and use that data. However, new market entrants may not have those same industry connections or lack the financial resources to purchase data.

RegTech innovators have addressed this challenge in different ways. One of the test participants informed us that there was no single, reliable, commercially available data set for ETF and mutual fund data. As a result, they purchase data from multiple providers and use a complex rule-based system for determining the correct data source and presenting that information to their clients.

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Vantage Point: Innovator Perspectives

We’ve heard insights on how firms of all sizes, from start-ups to multinationals, navigate the competitive landscape and maintain their competitive edge.

One common thread was a drive to provide unique, value-added services. RegTech innovators seek to differentiate their offerings on concept, price, target market, data coverage, underlying technology, system interoperability, or other features. Some build and rely on strategic partnerships, even with competitors, to offer customers seamless and integrated solutions.

One of the start-ups that participated in TestLab emphasized that competition spurs innovative thinking and development, compelling them to continuously improve their solution. We also noted that some test participants are carefully assessing their competitive landscape to identify market opportunities to develop new solutions. For example, when a competing RegTech provider introduces novel features, it motivates others to address the same need or trend. We saw the unique ways that test participants’ solutions were developed to address investment trends, such as ESG-focused products and the growing popularity of crypto assets.

Interestingly, another test participant pointed to the competitive landscape for registrants as an opportunity for RegTech innovators to distinguish and differentiate themselves. In their view, registrants and advisors now have access to the same or similar products and investment strategies, so they aim to provide registrants with value-added services that cater to the client experience in ways that their competitors can’t.