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To be a FinTech hub, Singapore needs RegTech

Singapore is working hard to develop its financial technology (FinTech) industry and results are beginning to show.

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Singapore is working hard to develop its financial technology (FinTech) industry and results are beginning to show.

In a recent report by Deloitte, Singapore was tied with London as the top FinTech hub in the world. Both cities attained a score of 10 on the index — the best score among financial centres ranked.

The score is an aggregate of a city’s position on three business indices, the Global Financial Centre Index, Doing Business 2016 and Global Innovation Index, with a lower score associated with an environment more conducive to the growth of FinTech.

As Singapore begins to reap the benefits of melding technology and finance in FinTech, it also needs to explore how technology can contribute to more effective financial regulation through what is known today as regulatory technology, or RegTech.

Singapore’s robust and transparent regulatory infrastructure has always been a crucial determinant of its success as a global financial centre.

Indeed, the Deloitte report highlights Singapore’s regulatory infrastructure as a key driver of its growing FinTech industry, along with its business-friendly environment, supportive Government and easy access to expertise.

However, there may be emerging regulatory challenges associated with the proliferation of FinTech solutions and technologies.

The new financial instruments and business models that FinTech start-ups bring with them add a level of regulatory complexity. Unlike traditional banks, FinTech start-ups may not be as well capitalised or leveraged. This suggests higher levels of risk.

Furthermore, the introduction of technologies that involve high-speed machine trading makes financial transactions and activities harder to track and regulate.

As the 2008 Global Financial Crisis has shown, the inability of regulators to keep up with financial complexity and innovation can be disastrous.

Given this context, RegTech can provide regulators with a set of tools that can help them quickly identify risks and formulate the appropriate regulatory responses.

The governments of major financial markets are beginning to explore the potential of RegTech. For instance, the government of the United Kingdom had allocated funds in its 2015 budget towards the development of RegTech technologies for improving regulatory outcomes. The Australian Securities and Investments Commission has taken it a step further by setting up a dedicated RegTech team and introducing new software to augment its regulatory policies.

These include the Market Entity Compliance System, an online stockbroker monitoring system, and Enhanced Investigative Analytics, which track unusual market trading patterns through data analytics.

There is, therefore, a growing application of RegTech to financial regulatory policy among major developed economies. However, this does not suggest that technology alone can solve all regulatory problems.

Like traditional financial regulation, RegTech is much more than its methods and technology. The expertise of the human regulator is still crucial for effective regulation, and it is important to keep this at the centre of financial regulation.

For instance, IBM recently announced the purchase of Promontory, a consultancy firm whose senior staff comprises former regulatory officials from the Federal Reserve and the Securities and Exchange Commission.

This has allowed IBM to incorporate the expertise of these former regulators into the programming of Watson, its cognitive artificial intelligence platform. Watson has been used for a variety of policy applications, with financial regulation being one of them.

This is a significant step forward and highly important for the future of regulation, given that artificial intelligence technologies such as Watson are likely to become a crucial element of governments’ future RegTech toolkits.

As both the FinTech sector and Singapore’s financial services industry in general continues to grow and diversify, there is a similar need to leverage both technology and human expertise to ensure effective financial regulation.

While there has been immense hype around FinTech, there has been much less interest in RegTech, with start-ups in this area few and far between.

Next month, the Monetary Authority of Singapore is holding its inaugural RegTech Forum, as part of its FinTech Festival, to bring together regulators, start-ups and entrepreneurs to explore the latest RegTech developments.

The authority has already begun to explore the possibilities of developing new RegTech solutions; for instance, its Application Programming Interface architecture facilitates the streamlining of banks’ submission of applications and transactions. This will make information disclosure more efficient.

But more needs to be done. For instance, Singapore needs to explore the possibility of developing artificial intelligence platforms that can flag risks and recommend regulatory responses in an automated manner.

RegTech start-ups and entrepreneurs with the technical expertise and technological infrastructure will play a crucial role in the development of such tools.

If Singapore is to retain its position as a leading FinTech hub in Asia and the world, it must now pay closer attention to the regulatory side of FinTech, particularly RegTech.

This, in turn, means making RegTech as attractive and exciting a business prospect for start-ups and entrepreneurs as FinTech, for the two go hand in hand in driving Singapore’s future as a FinTech hub.

 

ABOUT THE AUTHOR:

Woo Jun Jie is an Assistant Professor in the School of Humanities and Social Sciences, Nanyang Technological University and a Rajawali Fellow at the John F. Kennedy School of Government, Harvard University.

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