Insight: RegTech Reaches Beyond Compliance

The Innovation Office saw a unique opportunity for TestLab’s inaugural test to explore how technology could support registered firms in achieving their operational priorities while satisfying their regulatory obligations.

RegTech innovators develop solutions that aim to help registrants meet their regulatory obligations, and, in some cases, design or modify solutions to help registrants adapt to regulatory changes and requirements more effectively and efficiently.

While the OSC does not regulate RegTech, we recognize the benefits that it can provide to registrants, investors, and Ontario’s capital markets more broadly.

This is especially true where RegTech innovators respond to changes in Ontario’s regulatory framework such as the CFRs under National Instrument 31-103 – Registration Requirements and Exemptions (NI 31-103)

CFRs aim to deliver stronger protection for retail investors through expanded registrant KYC and KYP obligations that better align registrant and client interests, improve overall outcomes for investors, and enhance registrant-client communication.

These regulatory changes are rooted in the fundamental concept that clients’ interests are paramount when it comes to their dealings with registrants. TestLab 2022 explored how RegTech solutions could help registrants fulfill these obligations.

All seven test participants developed solutions that support aspects of the regulatory requirements in NI 31-103. While testing had its ups and downs, with results limited by the duration of testing and the number of advisors participating, test participants turned these challenges into opportunities.

We saw firsthand how test participants respond to evolving regulations, investment trends, and economic conditions and incorporate feedback from their testing partners into their development process.

A testing environment like TestLab 2022 can provide meaningful insights and highlight challenges into the ways that advisors think RegTech can support them and their clients.

As well, some of our OSC colleagues saw opportunities for these RegTech solutions to modernize our own work and are exploring how we can leverage these solutions for our own regulatory operations.

TestLab 2022 demonstrated that RegTech solutions can support regulatory workflows, are agile in their responses to regulatory change, and can be both simple and impactful.

Vantage Point: TestLab 2022 Highlights

Problem Statement 1: Making Product Information More Accessible

Canada’s securities regulatory framework requires that registrants know the investment products they offer and recommend to their clients.

Registrants must understand a product’s structure, features, risks, initial and ongoing costs, and the impact of those costs to be able to determine suitability. Once an advisor has determined suitability of an investment product for a client and included it in their portfolio, the advisor must monitor for and assess significant changes that could impact their client’s suitability determination.

As both the number and complexity of investment products have increased, we have heard from registrants that it can be challenging to identify, understand, and compare products, as well as to continuously monitor and manage diverse portfolios. Many of the registrants who responded to our outreach survey indicated that they only use manual processes for this work, suggesting an opportunity for RegTech to support registrants’ KYP processes and potentially expand their product offerings to allow for better tailoring of client portfolios.

The first TestLab 2022 problem statement asked how innovative technology solutions can help registrants more effectively collect, assess, and compare current product information and share this information with their clients.

Test partners saw the potential for RegTech to improve their workflows. Among other feedback, we heard that:

Product information and comparison tools can improve portfolio management, from monitoring and understanding portfolio fluctuations to assessing recommendations and supporting suitability reviews.

Automation and integration of product platforms with client information, onboarding, trading, or reporting systems can reduce friction in an advisor’s daily workflows.

Test partners also saw the potential for RegTech to help them share information and explain their recommendations to clients. We also heard that:

Tools that highlight product information in a straightforward manner, including through customized reports, can improve communications between advisors and their clients.

Product information tools that incorporate additional data points (i.e., comparable securities, performance benchmarks, advanced risk metrics) and solutions that create highly customized reports can help explain their recommendations to clients.

Solutions that include clear, simple, and intuitive visualizations for portfolio performance and benchmarking make the underlying data easier for advisors to understand and explain to their clients.

Problem Statement 2: Improving Information Sharing and Enhancing Client Interactions

Registered firms and advisors collect and document crucial information about their clients’ personal and financial circumstances to make suitability determinations and investment recommendations.

As part of the KYC process, registrants must make reasonable efforts to know and understand their clients and update their information regularly to meet regulatory obligations. RegTech solutions can provide effective and efficient methods to gather and maintain this crucial client information.

Our outreach survey responses indicated that the majority of registered firms rely on manual KYC processes, again suggesting an opportunity for RegTech to support registrants’ processes.

The second TestLab 2022 problem statement asked how innovative technology solutions can help registrants collect and assess client information to better understand and respond to their investment needs and improve communication.

Test partners saw the potential for RegTech solutions to reduce friction and support more efficient and effective processes. Among other feedback, we heard that:

Digital solutions can be more convenient and preferable to manual processes, as they can improve the speed and accuracy of onboarding and client information refreshes, potentially reducing the need for manual follow-up with clients.

Centralizing records can save time by making documents more accessible.

Enabling clients to easily update their own information in a secure system was a positive experience for both clients and advisors, with some test participants noting that it is important for both clients and advisors to be aware of these updates and to remain mindful of the potential impacts on product suitability determinations.

Automation can save time and effort, contributing to more effective workflows.

Test partners also saw the potential for RegTech to enhance communications between advisors and their clients. We also heard that:

RegTech solutions can improve client engagement and increase “buy-in” from clients during the information gathering and risk profiling process when using novel approaches to facilitate client discussions.

Tools that help align client risk tolerance and portfolio risk can help advisors recommend suitable portfolios for their clients. 

Solutions that help clients understand their own biases and preferences can improve risk tolerance discussions and generate new insights about a client’s risk preference.

Simple Solutions can be Impactful

Beyond our observations on the specific problem statements, TestLab 2022 inspired us to think more deeply about innovation and technological adoption in capital markets.

There can be a tendency to assume that progress can only come from revolutionary technologies that involve deep, wholesale change – but our first test showed us that simple solutions can have an oversized impact when they reduce friction for registrants and their clients.

We often hear about the manual effort involved in gathering KYC information and keeping it current. For RegTech solutions addressing pain points that arise when clients must complete and submit forms to a registrant, completion tracking and “blank field” checks result in real efficiencies by simply automating the work they are already doing.

We saw support for the theory that automation minimizes errors, for instance, when completing forms by pre-populating fields and showing a client their prior responses as a comparison, when available. We also saw positive feedback for solutions that allow advisors to group related accounts for aggregated review and management. Multiple advisors found these simple and intuitive features to be highly beneficial.

Similarly, one test participant recently added a calendar app integration to its solution to allow clients to check their advisor’s availability and send meeting requests. This simple value-add feature was created in response to advisor feedback, helping to streamline the client management process by reducing back-and-forth emails and calls to schedule meetings.

Vantage Point: Innovator Perspective

From the TestLab participants’ perspective, we heard that “the magic happens” when their RegTech solution not only meets regulatory compliance needs but also creates synergies for advisors through features that enhance information sharing, improve the advisor-client relationship, and offer benefits to clients beyond compliance with regulatory requirements.

We heard from multiple test participants that the development and adoption of RegTech solutions is no longer solely focused on delivering functional capabilities. Rather, the real benefit of these solutions lies in their ability to seamlessly integrate with other systems. There is an increasing demand for “interoperability” across diverse client, portfolio, trading, and marketing platforms – a concept frequently referenced by RegTech solution providers.