Regtech Collaboration ‘Could Solve EU Fragmentation’

Industry-wide adoption of regtech could break down legal fragmentation across the EU market and should be supported widely by authorities, influential experts have argued.

Financial institutions across the region are increasingly turning to emerging technology that eases and automates compliance processes, helping cut costs and improve efficiency.

But according to Pascale-Marie Brien, a senior policy advisor at the European Banking Federation, a Brussels-based industry group, the technology could have wider implications for the EU’s regulatory landscape.

“I interact a lot with the European Commission, the European Banking Authority and the European Central Bank, and one of their concerns is indeed compliance,” she said at Money20/20 in Copenhagen on Tuesday.

“I’m sure that if we are bright enough to create a platform where we have regulators, we have market participants … and regtechs, I’m sure it will be in everybody’s interest to work around this platform.

“We are going to come to a common understanding of the legislation, and the positive side effect of this is that we will have the same sort of legislation throughout Europe.”

Brien said that directives often become so distorted by differing local interpretations and exemptions they are almost unrecognisable from the EU-level text.

“You can’t recognise a directive because each national authority has made its own fantasy around the directive,” she said.

But if processes that are currently costly and complex for financial firms, such as verifying the identity of a new customer, become automated throughout the EU, that will likely result in a closer alignment of standards across the bloc.

On the regulatory side, there are relatively few barriers for banks, fintechs and payment firms looking to outsource compliance activities.

Peter Oakes, the founder of Fintech Ireland and a former enforcement director at the Bank of Ireland, recently urged EU financial firms using regtech for customer onboarding to keep in mind the specific wording of the 4th Anti-Money Laundering Directive (4th AMLD).

Using the UK transposition as an example, Oakes said the directive demands customer identity verification “on the basis of documents or information obtained from a reliable source which is independent of the customer”.

That means firms outsourcing to regtech businesses need to ensure the data being transferred initially is sufficiently accurate.

Speaking at an industry event in London late last month, Oakes said: “The question I now have as a lawyer is: is that a reliable source?

“When you’re using a regtech provider, a regtech solution, make sure you remember what your legal obligation is because it’s up to you to decide whether it’s a reliable source to help you meet your customer due diligence obligations.”

He said that a recent €2.3m fine against Irish bank AIB — a “big fine in Ireland for AML” — was a direct result of the institution not being able to use regulatory technology to verify identity because the initial data was not reliable.

For e-money firms, Oakes added that authorities’ attention is likely to be focused on consumer protection rather than stability or market integrity.

“That’s where regulators are going be sited,” he said. “If I was looking at regulatory technology I’d be looking around conduct of business and consumer protection areas to roll out, if I only had a limited budget on regtech.”

Representatives from regtech firms have increasingly pressed authorities to make sure they understand and embrace the technology itself, pointing to efforts made in the UK to lead that charge.

Eamon Jubbawy, co-founder and chief operating officer of London-based regtech firm Onfido, described the Financial Conduct Authority (FCA) as an “incredible, forward-thinking organisation”.

“We’re big fans of the regulators,” he said at Tuesday’s event. “The regulators don’t actually regulate regtech, so there’s a very different dynamic and a much more open conversation between us.”

Jubbawy said that the UK’s FinTech Delivery Panel, which was established last year, is now “pulling together a vision for what we want fintech to look like in 2020” under the watchful eye of the FCA and HM Treasury.

Further details are expected early next month.

Konrad Alt, chief operating officer at San Francisco-based regtech firm Merlon Intelligence, said that not all regulators are prepared to offer that level of support.

“You can certainly find many regulators who are familiar with the general concept, and you can find some that are pretty sophisticated about it,” he said. “But I would say overall the level of understanding is fairly low.

“They’re interested — they just don’t necessarily understand.”