Suptech Trends: Where is the Industry Heading?

The Expanding Role of Technology in Financial Services

Technology has become integral to almost all facets of the financial services sector. The global shift towards online interactions has spurred significant growth in tools and infrastructure designed to assist individuals with money management and payment processing over the last ten years.

As the financial world increasingly relies on technology for operations, trend analysis, and service delivery, financial regulators are also adopting new technologies. These are being utilized to monitor markets, oversee financial institutions, and streamline administrative processes.

The Rise of Suptech

The development of specialized technologies specifically for regulatory oversight has, in recent years, become known as supervisory technology, or suptech. Interest in suptech is rapidly increasing worldwide.

A wide range of prudential and conduct regulators are actively exploring suptech. Examples include the FDIC, CFPB, FINRA, and Federal Reserve in the United States. Furthermore, the U.K.’s FCA and Bank of England, the National Bank of Rwanda, and Asian regulators like ASIC, HKMA, and MAS are also involved.

Several international bodies, often referred to as “super regulators,” are also engaged in suptech initiatives. These include the Bank of International Settlements, the Financial Stability Board, and the World Bank.

Key Suptech Use Cases

This article will delve into several core suptech applications, consider its potential future, and examine the obstacles regulators face as the field evolves. We will concentrate on three primary areas: regulatory reporting, machine-readable regulation, and market and conduct oversight.

It’s important to note that almost all financial services regulators are currently involved in some form of suptech activity. The use cases discussed here are illustrative examples, not an exhaustive list.

Regulatory Reporting

Suptech is transforming how financial institutions submit data to regulators. Automated reporting systems are replacing manual processes, increasing efficiency and reducing errors.

Machine-Readable Regulation

Converting regulations into a machine-readable format allows for automated compliance checks. This ensures firms can easily understand and adhere to complex rules.

Market and Conduct Oversight

Suptech enables regulators to monitor market activity in real-time, detect potential misconduct, and respond swiftly to emerging risks. This proactive approach enhances market integrity.

The future of suptech promises even greater innovation, with potential applications in areas like artificial intelligence and blockchain technology. However, challenges remain in areas such as data privacy, cybersecurity, and the need for skilled personnel.

Defining Suptech: A Comprehensive Overview

To begin, a clear understanding of suptech requires examining several definitions. Both the World Bank and the Bank for International Settlements (BIS) have proposed definitions that serve as a strong foundation for discussion.

The World Bank describes suptech as the application of technology to improve and streamline supervisory procedures, specifically from the viewpoint of supervisory bodies. While somewhat self-referential, this definition offers a valuable starting point.

The BIS, conversely, defines suptech as the utilization of technology for regulatory, supervisory, and oversight functions. This broader definition effectively captures the wider range of applications within the field.

Despite minor variations, the consistent element across these definitions is the acknowledgement that the core purpose of suptech is to support regulators in their oversight of the financial system’s stability, structure, and behavior.

Essentially, suptech technologies are designed to enhance the processes of regulatory supervision and enforcement.

Key Components of Suptech

Suptech encompasses a diverse range of technological tools and approaches. These can be broadly categorized into several key areas.

• RegTech: Technologies used by financial institutions to meet regulatory requirements.
• SupTech Core: Tools directly used by supervisors for monitoring and analysis.
• Data Analytics & AI: Utilizing advanced analytics and artificial intelligence for risk assessment.

The integration of these components allows supervisory authorities to gain deeper insights into the financial landscape.

Suptech isn’t simply about adopting new technologies; it’s about fundamentally changing how financial regulation and supervision are conducted.

The Benefits of Implementing Suptech

The adoption of suptech offers numerous advantages for both regulators and the financial industry.

Increased efficiency in supervisory processes is a primary benefit. Automation and data analytics reduce manual workloads and accelerate reporting cycles.

Enhanced risk management capabilities are also crucial. Suptech allows for more proactive identification and mitigation of systemic risks.

Improved data quality and accessibility contribute to more informed decision-making. Regulators can leverage real-time data for timely interventions.

Ultimately, suptech fosters a more stable and resilient financial system.

Regulatory Reporting

Regulatory reporting encompasses a wide range of processes. These include financial institutions submitting trading information to oversight bodies, and the subsequent analysis of this data – alongside corporate information – by regulators to gauge institutional or market stability.

Both the Monetary Authority of Singapore (MAS) and the Federal Deposit Insurance Corporation (FDIC) are increasingly utilizing transactional and financial data submitted by firms. This is done to evaluate their financial strength.

The MAS, collaborating with the Bank for International Settlements (BIS), has conducted technology sprints to gather innovative ideas concerning regulatory reporting. Meanwhile, the FDIC is developing a solution for “on-demand” bank monitoring.

This new system aims to move beyond the limitations of “point-in-time” reporting. The FDIC’s project specifically focuses on smaller community banks, which currently provide only aggregated financial data quarterly.

Suptech Development in Hong Kong

The Hong Kong Monetary Authority (HKMA) has recently detailed its three-year plan for suptech development. A key component of this plan is the creation of a “network analysis” methodology.

The HKMA intends to analyze reported data concerning corporate shareholdings and financial exposures. This data will be visualized as network diagrams, making the relationships between entities clearer.

Enhanced transparency regarding the connections and dependencies between banks and their clients will empower HKMA supervisors to identify potential early warning signs within the broader credit network.

The Shift from Reactive to Proactive Regulation

A recurring challenge for regulators is determining how to oversee markets and firms effectively. Traditionally, regulation has often been a reactive process, based on historical data.

Regulation and enforcement frequently involve reviewing past actions and data to determine appropriate sanctions or to establish frameworks for specific activities or financial products.

This retrospective approach can be overly focused on past shortcomings. It may lack the adaptability needed to foresee or respond to new risks or financial innovations.

The Importance of Real-Time Data

A common thread running through these regulatory reporting initiatives is the need for more comprehensive and frequent data collection. The goal is to gain a better understanding of market dynamics and an organization’s financial health in near real-time.

Regulators are recognizing that improved reporting can facilitate the early detection of market volatility or risks facing individual firms. This is achieved through continuous analysis of financial, corporate, and transactional data.

The Advancement of Machine-Readable Regulation

Suptech is increasingly focused on enhancing the accessibility and interactivity of regulatory texts and laws. This is because these written documents both establish the authority of regulators and define the compliance obligations for financial institutions.

The Bank for International Settlements (BIS) has noted that utilizing machine-readable regulation has the potential to “diminish discrepancies between the intended meaning of regulations and their practical interpretation.” It could also enable supervisory bodies to more effectively evaluate the effects of regulatory modifications, facilitate consultations on regulatory improvements, and lessen overall regulatory intricacy.

FCA Tech Sprint Demonstrates Feasibility

In 2017, the Financial Conduct Authority (FCA) held a tech sprint specifically addressing this application. Their findings indicated, “This tech sprint successfully demonstrated our ability to convert a regulatory requirement from the FCA Handbook into a format understandable by machines.”

This machine-understandable language then allows systems to directly execute the regulatory requirement, extracting necessary information from firms automatically.

FSRA Abu Dhabi's API Framework

The Financial Services Regulatory Authority (FSRA) in Abu Dhabi has developed a technical framework. This framework allows regulations to be expressed as “a collection of APIs and a regulatory taxonomy, enabling dynamic interaction between firms and fintech companies.”

The FSRA has made these APIs publicly available, allowing organizations to build applications utilizing machine-readable regulatory data.

The Appeal of Clarity and Executability

Interpreting and implementing written regulatory requirements currently demands substantial manual effort. Consequently, the clarity and direct executability offered by machine-readable regulation are highly desirable.

Financial institutions currently employ dedicated legal and compliance teams to assess the operational consequences of new regulations and implement controls to ensure adherence.

Impact of New Regulations

New regulations can govern the marketing of financial products or establish organizational prerequisites for entities offering specific products. They can also influence employee conduct, the technologies supporting business processes, and potentially necessitate new roles, responsibilities, and reporting procedures.

Therefore, the prospect of deploying, executing, and enforcing regulations through code is particularly attractive.

Benefits of Automation

Implementing automation via machine-readable regulation could, at a minimum, streamline these processes. In an ideal scenario, it could automatically implement changes derived from the regulatory code.

The realization of truly machine-executable regulation promises to reduce administrative burdens, minimize risks associated with human error, and enhance manual processes related to the review, analysis, and implementation of new rules.

Conduct and Oversight in Financial Regulation

The realm of conduct and oversight covers a diverse array of applications, and this section will explore several illustrative examples.

Currently, two supervisory technology (suptech) initiatives are focused on analyzing customer complaints to extract insights into the practices of individual firms and broader market dynamics.

The Central Bank of Kenya (CBK) undertook an examination of customer complaint data to gain a clearer understanding of reporting patterns and the underlying themes of the complaints received. The World Bank noted that this project assisted the CBK in “identifying emerging risks and previously unknown issues within the market.” The ability to detect unforeseen market challenges through complaint data enabled the CBK to assess potential problems based on tangible evidence and validated its “ability to uncover subjects without predefined specifications or assumptions.”

A further significant advantage of the CBK’s project was the discovery, through topic association with metadata, of how complaints differed based on the originating bank or the time frame in which they were submitted. Analysts could also determine if there were variations between complaints classified as “open” versus “closed.” Understanding complaint specifics for each bank or the frequency of certain complaint types during specific periods provides valuable data for enforcement or investigative actions.

For instance, if complaint data reveals a widespread problematic practice among several banks, it could trigger a “horizontal sweep” – a review of a single issue across all regulated entities to determine their respective approaches. Such sweeps empower regulators to formulate well-informed responses to prevalent risks or areas of concern.

The CFPB has launched multiple projects to analyze customer complaint data, mortgage information, and consumer credit data from U.S. financial institutions to identify trends and issues. Notably, the CFPB publishes these findings publicly, making them accessible to researchers and others for independent analysis.

Complaint data is instrumental in helping regulators better monitor and regulate firm conduct, as well as comprehend broader market trends. As previously mentioned, the enhanced capability to transition from a reactive to a proactive regulatory stance can be exceptionally beneficial in anticipating disruptive events, whether at the market level, within a group of banks, or at an individual firm.

Another crucial conduct issue for regulators is ensuring that financial advertisements adhere to standards of fairness, balance, and accuracy. The increasing volume and complexity of financial services advertising, driven by the growth of online ads and the expanding use of video and audio platforms, present significant challenges for regulators tasked with reviewing them.

In a recent podcast, FINRA detailed its utilization of technology for advertising oversight, highlighting the employment of machine learning and natural language processing techniques to support its review processes. Although suptech isn’t explicitly mentioned, FINRA’s activities in this area clearly align with its principles.

Currently, discussions surrounding Central Bank Digital Currencies (CBDCs) are prevalent. As the BIS has pointed out, CBDCs could offer suptech-like oversight benefits for “safeguarding public trust in money, maintaining price stability, and ensuring secure and resilient payment systems and infrastructure.”

Furthermore, many CBDC advocates propose building these currencies on blockchain technology. Several banks have already initiated or announced plans for CBDC pilot programs, indicating that this is a topic that will continue to gain prominence. The Banque de France and the MAS recently concluded a cross-border payment and settlement experiment utilizing J.P. Morgan’s Onyx blockchain network.

Suptech's Hurdles and Future Trajectory

The extensive and intricate nature of suptech applications presents significant challenges for regulators. These challenges mirror those faced by both technology startups and established companies as they strive to advance suptech initiatives.

Recent surveys and reports highlight concerns such as securing commitment from senior leadership and the difficulty of locating qualified computer programming professionals. These issues are well-recognized within the startup ecosystem and Big Tech, having been persistent obstacles for years.

A Sign of Progress

However, within the suptech landscape, these challenges could indicate a growing level of maturity. They suggest that regulatory efforts are increasingly aligned with the broader advancements in the financial services and technology sectors.

The widespread availability of cost-effective cloud computing and the increasing sophistication of open-source AI models are expected to further drive suptech’s development. Tools that enable faster, more efficient innovation without substantial capital investment will prove invaluable.

Talent and New Opportunities

These hurdles may necessitate regulators to compete with startups for talent, tooling, and competitive salaries. Nevertheless, the technical complexity and real-world impact of suptech could unlock novel career paths for individuals seeking diverse work experiences.

Specialized educational certificates or courses focused on suptech skills could establish a unique niche for professionals eager to apply their expertise to areas of public interest and importance.

Collaboration and Innovation

From an innovation standpoint, utilizing tech sprints and similar collaborative approaches with external organizations is crucial for developing suptech solutions. Many regulators have established public innovation hubs to engage with startups and monitor technological advancements in the private sector.

Public-private partnerships in suptech may become more prevalent, fostering more inclusive feedback loops between financial institutions, regulators, and startups.

A New Era of Regulation

Regulators are challenging traditional perceptions of themselves as inflexible and conservative by developing innovative and effective suptech platforms. These advancements demonstrate that a combination of creative thinking, experimentation, and scalable technologies is revitalizing the regulatory approach.

Considering the global regulatory objectives of market stability, transparency, and consumer protection, the dedication of resources and expertise to suptech should be embraced by all stakeholders within the financial system.