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Is it Time for RegTechs to be Regulated?

There is increasing confusion by financial institutions and regulators about the differences between FinTechs and RegTechs.

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This may be controversial – due to the amount of extra work involved for both the RegTechs and the regulators – but is it time for RegTechs to be regulated?  There is increasing confusion by financial institutions and regulators about the differences between FinTechs and RegTechs and I now think the only way to resolve this and to create a level playing field is for RegTechs to be regulated.

FinTechs are founded to compete with traditional methods in the delivery of financial services and are therefore subject to the regulatory framework of where they operate. They are often given a period of time to try out their new product or service under an exemption whilst in some sort of regulatory sandbox environment before they need to apply for a full license. RegTechs, on the other hand, have not needed to be regulated as they aren’t competing with traditional methods of financial services or carrying out regulated activities. RegTechs are simply using technology to enhance the management of regulatory processes such as compliance, regulatory monitoring and reporting. Both FinTechs and traditional investment firms are subject to the regulatory framework they operate within – and both need RegTechs in order to increase efficiencies.

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The Issues

So why is there an issue? RegTechs are increasingly being asked during the sales process with financial institutions if they are regulated. The answer to this, as they are RegTechs, is always ‘no’. However, the confusion comes because they are often compared to a regulated FinTech who may also happen to offer some form of RegTech product as part of its core product suite – these FinTechs often license the product on a White Label basis from a RegTech to sell on to a financial institution. From the financial institution’s perspective, they are being sold a RegTech product from a regulated entity.

It sounds as if a simple explanation about the differences would suffice at this stage but we are increasingly seeing this situation and it puts pure RegTechs at a disadvantage during the procurement process. If a client thinks they have an option to onboard one provider who is regulated and one who isn’t, they will favour the regulated entity. This is detrimental to RegTech businesses and isn’t creating a level playing field.

I am also aware of many FinTechs who are offering RegTech solutions as their main product suite, which raises the question about how they became regulated in the first place, and whether that was part of their business plan objective in order to differentiate themselves from the competition. If it’s the latter, one can see how this is blatantly unfair. Leaving the situation as it currently stands will simply become an opportunity for regulatory arbitrage which is something we have witnessed in recent years in Europe and which ESMA has been taking steps to address in order to create some sort of harmonisation and ensure greater protection for investors.

In recent months I’ve taken part in a number of forums with different regulators and it’s clearly been apparent that even they confuse RegTechs and FinTechs. The current situation is escalating and it urgently needs addressing.

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By  Remonda Kirketerp-Møller, December 5, 2020, published on Finance Magnates

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