Innovation thrives on crisis. Such would be the conclusion when one looks at the development of new technologies designed to facilitate the delivery of regulatory requirements, or in the shorthand of early-stage investment, regtech.
It is in fact an offshoot from fintech – broadly the facilitation of elements of financial services through the adoption of technology – and similarly it has its roots in the financial crisis of 2008. As with fintech, regtech has already received official encouragement from the world’s financial watchdogs, and indeed, the UK’s Financial Conduct Authority (FCA) actually coined the term itself.
Back in late 2015, the FCA launched a call for input (https://www.fca.org.uk/publication/call-for-input/regtech-call-for-input.pdf) that said it saw innovation in financial services as a key part of its policy objective of promoting effective competition in in the interests of consumers.
Moreover, following the financial crisis the FCA recognised that the subsequent imposition of greater reporting requirements meant it was important to encourage the further development of technologies that “help firms better manage regulatory requirements and reduce compliance costs.”
The FCA has subsequently launched its own accelerator/incubator-type programme - Project Innovate - and alongside that it has established a regulatory sandbox that allows firms working under its umbrella to initiate their ideas, work on prototypes and interact with consumers without having to fulfil the FCA’s normal full licensing process.
Of the 18 firms that have already been accepted to the sandbox, there are many examples of companies utilising the various technologies that GamCrowd has written about in recent months including blockchain, big data and AI and machine learning.
One firm included in the sandbox is Tradle, a blockchain-enabled service that creates personal or commercial identity and verifiable documents on a distributed ledger. Gene Vayngrib, chief executive and founder of Tradle, succinctly points to the hope among regulators of what the utilisation of digital technology can achieve in the sphere of regulation.
“Paper regulation is volumes and volumes of text,” he says. “The mismatch between the understanding of what regulators will punish you for – or not - creates fear and freezes innovation. We need to change that dynamic.”
He adds: “This is the first objective – to turn regulation from the big stick to supervision and monitoring and preventing big systemic failures like the financial crisis. Creating the stability and trust in the system so the market can operate is the main aim of regulation and digital regulation can do it better than paper regulation.”
A financial example
In this the financial regulator in the UK is not only ahead of many other financial watchdogs around the world but also of many other sectors, including the gambling industry.
“The financial services industry has managed this transition well by creating sandboxes for collaborative innovation, and making guidance less restrictive while keeping risk low,” says Jamie Miles, head of fintech at data and digital identity specialists Onfido.
“They’ve also encouraged reporting back with data to demonstrate that the new technologies coming to market are at least as good at, if not better than incumbent solutions,” he adds. “It would be good to see the gambling industry do similar to accelerate the turn towards technological innovation that’s already evident.”
Another company working in a similar area is Trulioo, which again is an innovative digital identity and solutions company. General manager Zac Cohen says regulatory bodies are a facing big challenges because of the impact accelerating technologies on their regulatory environment.
“In the end, the mutual goal is keeping consumers safe,” he says. “So when you look at the controls and oversight regulators demand, this is most often best approached by an equally innovative, purpose-driven technology designed for such an implementation.”
The need for speed
The Institute of International Finance (IIF) neatly summed up why the application of regtech solutions could be so beneficial for the financial services sector. In a paper published in March last year looking specifically at technology solutions for compliance and reporting, it identifies the apparent bottlenecks in these areas and looks at how they might be aided or solved by digital solutions.
This includes such areas as the risk of data aggregation, the complexity of risk modelling and forecasting, the need for the monitoring of payment transactions, personal identification issues and the identifying of new regulations.
It then identifies the technologies that can be brought to bear and it is a strikingly familiar rundown of the challenges faced today. They include machine learning and AI, cryptography, blockchain and other distributed ledgers, APIs, biometrics and shared utility and cloud functions.
Encouraging technology adoption
Christopher Woolard, the director of strategy and competition at the FCA, said early last year that the body is “encouraging firms to be innovative with technology and helping them to identify ways to integrate these new technologies into their business models.”
It is a train of thought that has been picked up by the UK’s Gambling Commission. In various public comments, most notably in a speech from chief executive Sarah Harrison at the Commission’s raising standards conference held in November last year where she said the body wants to see operators “harnessing the same innovation and tools that are used to determine customer profitability, to drive customer protection.”
Although the Commission has said that a specific innovation project of regulatory sandbox isn’t being considered for the gambling industry, according to a spokesperson, it does expect the industry to “innovate in order to survive in a competitive market and that as a regulator we recognise that.”
The most obvious areas where regtech solutions from the financial services sphere will have a read-across within the gambling sector is with digital identity and KYC and AML and responsible gambling. In the coming weeks, GamCrowd will be looking at companies working in these areas to see how they are already pushing digital solutions to the fore.
GamCrowd will also include a panel on regtech as part of our GamCrowd Tech Week programme. Further details of the participants will be announced in due course.