The world of financial services is changing rapidly, and regulators are struggling to keep up. Fintechs, financial firms and regulators themselves want them to do better.
Cambridge University has launched a wide-ranging program to address some of the challenges of making regulation in finance work better. One aspect is called the Regulatory Genome Project, borrowing the language of biology to talk about “sequencing” the world’s regulatory texts. The larger project has at least three related parts — one is to create an open repository of machine-readable regulatory information, another is to encourage regulators to write regulations in machine-readable form and a third is to encourage standardized regulations across borders.
“Fintechs want regulatory clarity, they understand that is a trust-building mechanism, If they can’t establish trust there will be no adoption,” said Robert Wardrop, Director of the Cambridge Centre for Alternative Finance (CCAF) at Cambridge Judge Business School. They are also working with the university’s Department of Computer Science and Technology.
“In three years regulators have radically changed their stance from their more traditional inaction stance because every action by a regulator implies a risk and doing nothing was perceived as lower risk,” Wardrop said.
Regulators and governments have also come to understand that good regulation, which can be implemented efficiently and will support innovation, can provide a national competitive advantage.
“The Regulatory Genome originated out of a research project led by the CCAF with initial funding provided by the Omidyar Network to create a solution – named RegSimple – that simplifies the comparison of regulations across different jurisdictions,” the university explained in its announcement. “Additional funding has been provided by the UK’s Foreign, Commonwealth & Development Office to expand the scope and functionality of RegSimple to serve the needs of regulators in developing and emerging economies. Regulators from more than 20 jurisdictions are already contributing to the project.”
RegSimple started as a tool to help fintechs understand regulations, Wardrop said.
“Fintechs in a given market were having problems expanding into adjacent markets — there was too much friction and understanding the regulatory environment took time and legal fees.”
After a pilot project ingested regulations in machine readable form, the CCAF thought regulators might be interested as well, especially regulators in developing countries who were looking for good models of regulation.
“The idea of having a tool to do regulatory benchmarking was pretty compelling but has been highly inefficient — using Googling and spreadsheets. Regulatory change is accelerating so it may have changed underneath your feet by the time you finished your analysis.”
This could help developing countries with fast moving developments like digital finance, he added. Many developing countries are followers in developing financial regulations, and the regulators most widely followed are the Monetary Authority of Singapore (MAS), the Financial Conduct Authority (FCA) and Abu Dhabi Global Markets in the UAE. But fewer than 10 regulators around the world are making their rule books machine readable. (The United States is not a model for other regulators because it is so complex with some regulation at the state level and overlapping or conflicting jurisdictions among federal regulators.)
Wardrop said regulators are being challenged by the broad shift to digital innovation in financial services.
“The impact of Covid-19 has super-charged that shift and has put regulators on the back foot in terms of recognizing they need to respond because new risks are emerging, especially around cyber risk, risks that aren’t covered in existing regulations. We have also seen a shift from entity-based to activity-based regulation” so a regulation would apply to lending, whether the loan is from a bank or from Amazon.
Another shift among regulators is from being technology agnostic to understanding that technology does matter, he added. As regulators rely increasingly on code and data they face a skills mismatch — they have traditionally been largely staffed by lawyers and have few, if any, data scientists.
“If they can’t understand data science how are they ever going to have a shift in the reporting regime? If you’re pulling data from your firms and using data to analyze, how do that without having data scientists?”
Wardrop hopes to convene a large number of players — financial firms, law firms, exchanges, and infrastructure providers — later this year in a forum to address these issues.
“I would expect to have 50 to 100 jurisdictions and 50 to 100 financial services and fintech firms to launch the largest public-private initiative in this area. This is not a five-year deal, this is a 12-month deal. We will use the convening power of Cambridge University to achieve those numbers.“