Regulatory Processes

in Financial Industry
UNIT 3

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 3.1 Concept of financial stability board

3.2 Concept of Regulatory Sandbox

Topics to Be 3.3 Concept of RegTech
Covered
3.4 Work done by RegTech companies

3.5 Concept of SupTech

3.6 Difference between RegTech and SupTech

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  The Financial Stability Board (FSB) is an international body that
monitors and makes recommendations about the global financial
system.
 FSB was established in 2009 under the aegis of G20 by bringing
Concept of together the national authorities, standard setting bodies and
international financial institutions for addressing vulnerabilities and
developing and implementing strong regulatory, supervisory and other
Financial policies in the interest of financial stability.

Stability  India is an active Member of the FSB having three seats in its Plenary
represented by Secretary (External Affairs), Deputy Governor-RBI and
Chairman-SEBI.
Board  Regular interaction with FSB takes place through periodic conference
calls and meetings. Information is exchanged with FSB member
jurisdictions frequently as per international requirements.
 The FSDC Secretariat in the Department of Economic Affairs
coordinates with the various financial sector regulators and other
relevant agencies to represent India’s views with the FSB

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  FSB has set up a task force named Financial Innovations
Network (FIN) for the assessment of FinTech, inter alia
recommending that innovations be examined through the
lens of authorities’ and Secretarial Standards Board’ (SSB)
responsibilities.
 Basel Committee on Banking Supervision (BCBS) and the
Concept of FSB have conducted a joint survey of their members’
Financial FinTech-related activities, including the use of regulatory
Stability sandboxes and innovation hubs.
Board (FSB)  FSB has considered the financial stability implications of
distributed ledger technology, and continues to work in this
area, jointly with Committee on Payments and Market
Infrastructures (CPMI), to identify key issues that market
participants and policymakers need to address.
 FSB is conducting an in-depth study of the financial stability
implications of peer to peer lending with the BIS’ Committee
on the Global Financial System.

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 Preparing annual reports on the implementation of reforms and their effects

Coordinating financial sector policies

Conducting outreach activities

Functions Building resilient financial institutions

of the Addressing SIFIs

Financial Supervising the global financial market

Stability Making the derivates market safer

Board Enhancing the resilience of non-bank financial intermediation

Formulating additional policies on specific areas of the global financial market

Preparing progress reports to the G20

Conducting peer reviews

Analyzing the effects of reforms

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Assessment of Vulnerabilities
 The Standing Committee on Assessment of Vulnerabilities
(SCAV) is the FSB’s primary committee for the assessment of
risks and vulnerabilities in the global financial system.
Policy Development and Coordination
 After the evaluation and assessment of vulnerabilities in the
financial market and potential risks that can hinder the smooth
flow of the global financial system, the FSB focuses on policy
development and coordination.
Implementation Monitoring and Effects of Reforms
 The FSB, through the Standing Committee on Standards
Implementation (SCSI), oversees the implementation of newly
developed policies and financial reforms.

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FSB is currently
undertaking a study of
the key elements
underlying the broad greater access to and greater efficiency of
convenience of financial financial services, and
swath of FinTech services
innovations and
examining the financial
stability implications of to push toward a more
those elements. decentralized financial
That work has identified system, in which FinTech
three elemental firms may be
disintermediating
'promises' common to a traditional financial
broad range of FinTech institutions.
innovations

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 Concept of Regulatory Sandbox
 The Reserve Bank of India (RBI) launched the regulatory
sandbox in 2019 to support and foster innovation in the fintech
Regulatory industry while ensuring consumer protection and financial
stability.
Sandbox  A regulatory sandbox is a special program created by the
government to help new and innovative businesses in the
financial technology (fintech) industry test their ideas in a safe
and controlled environment. It allows these businesses to
experiment with new products and services without having to
worry about meeting all of the usual rules and regulations. This
helps these businesses to see if their ideas are successful, and it
also helps the government to make sure that customers are
protected and the financial system remains stable. Think of it like
a playground where fintech businesses can try out new things
and play without getting into trouble.
 The concept of regulatory sandboxes in India originated from the
Inter-Regulatory Working Group on FinTech and Digital Banking,
which recommended the creation of a sandbox in 2016. Whereas,
The RBI published its first framework for a regulatory sandbox in
2019.

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  The RBI has launched four cohorts (segments) of the regulatory sandbox.
Regulatory  In the first cohort, ten fintech companies were selected for testing.
 The second and third cohorts were focused on fintech solutions for
Sandbox financial inclusion and digital identity verification, respectively.
 The fourth cohort, launched in 2021, focused on mitigating financial
fraud.
 The Insurance Regulatory and Development Authority of India (IRDAI)
launched a regulatory sandbox in 2021 for the insurance industry. Insurers
were granted the opportunity to experiment with novel products, services,
and business models within a carefully regulated environment, thanks to the
implementation of the sandbox.
 The Ministry of Agriculture and Farmers Welfare is also exploring the
possibility of a regulatory sandbox for the agricultural sector. The sandbox
will aim to promote innovation in agricultural technology, improve access to
finance for farmers, and boost rural entrepreneurship.

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 Objective of
Sandbox
Sandbox should help to
encourage more FinTech
experimentation within a
well-defined space and
duration where
regulators will provide
the requisite regulatory
support, so as to increase
efficiency, manage risks
better and create new
opportunities for
consumers.

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 • It provides a safe space for fintech companies to experiment
with new technologies and business models, promoting innovation
in the industry. This can lead to the development of new, more
Importance efficient products and services that can benefit consumers and
of businesses alike.
• Its framework provides a controlled environment for testing new
Regulatory products and services, allowing companies to identify and mitigate
potential risks before launching them in the market. This can reduce
Sandbox for the risk of failure and increase the chances of success for fintech
FinTech companies.
• It can help fintech companies to reduce the time to market their
Companies products and services. The controlled testing environment allows
companies to quickly identify and resolve any issues that may arise,
allowing them to launch their products and services faster.

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Regulatory sandboxes
provide an opportunity for
banks to collaborate with
fintech firms and leverage
their innovative
technologies and business
models to improve their
products and services. It
can also encourage banks
to innovate and develop
new products and services
that can meet the
changing needs of
consumers and
businesses.

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 FinTech RegTech SupTech

Short for “financial Short for “regulatory Short for “supervisory

technology,” it refers to any technology,” it refers to technology,” it refers to
technology that is used to technology used to regulate technology used to
deliver, manage, or optimize financial compliance operations at a supervise compliance
services. company. operations at companies.

Used by businesses and Used by businesses (to

Used by businesses (to
consumers alike for a variety of regulate their own
supervise other businesses).
reasons. processes).
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  RegTech startups are saving firms billions in regulatory
fines and displacing manual risk and compliance with
cutting-edge technology.
 To meet the need for better and more efficient
regulation of businesses, especially for financial firms,
an emerging crop of regulatory technology startups are
RegTech building tools aimed at helping companies improve
compliance, mitigate risk, and streamline processes.
 In addition, RegTech companies can help corporations
avoid fines for non-compliance by keeping them on top
of the growing levels of regulatory and compliance
requirements. Looking ahead, if early adoption
continues, RegTech could play a pivotal role in
predicting and preventing the next financial crisis.

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  Regulatory technology, or RegTech, is an emerging technology that
involves the implementation of digital tools and processes that
improve the way organizations manage their increasing regulatory
compliance commitments.
 The term RegTech was first coined by the UK’s Financial Conduct
Authority(FCA) in 2015 who called it:
 “A subset of FinTech that focuses on technologies that may facilitate
Concept of the delivery of regulatory requirements more efficiently and effectively
than existing capabilities.” In simple terms it refers to any technology
RegTech that ensures companies comply with their regulatory requirements.
 RegTech uses many cutting-edge technologies such as artificial
intelligence, big data, cloud computing, machine learning, to name a
few, which ensure companies are more effective in reaching
regulatory compliance. RegTech has helped to minimize the risk of
human error by automating the processes.
 RegTech = innovations by institutions to help meet regulatory
requirements

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  Regulatory monitoring
 Regulatory risk assessments
 Compliance monitoring
 Know Your Customer monitoring
 Anti-money laundering monitoring
 Tracking and reporting
RegTech  Aggregation and transaction reporting

 While FinTech is focused on innovative technologies

and software for the financial services industry,
RegTech is focused on innovative technologies that
address the complex data and information requirements
within the regulatory compliance space.

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 23
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  Automating low-level manual work
 Lessening operational and delivery burdens
 Speeding up processes
 Augmenting transparency amid market shareholders
and regulators
The Benefits  Facilitating standardization across industries
of RegTech  Increasing internal efficiencies
 Improving regulatory effectiveness
 Increasing accountability and accuracy
 Ensuring internal alignment within organizations
 Delivering better and faster decision making abilities
and improving outcomes

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 Dynamic
Compliance

Trading in Identity
Management
Uses of Financial
Markets and Control
Regulatory
Technology
(RegTech) Transaction Risk
Monitoring Management

Regulatory
Reporting
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  Challenge: Regulatory compliance puts a heavy burden on
organizations.

Solution: RegTech helps to automate manual tasks, such as

processing paperwork and other labor-intensive activities.

 Challenge: Organizations need to understand where their highest

Increasing regulatory risks may be coming from.
Internal  Solution: RegTech allows organizations to deploy risk analysis
more effectively. Predictive analytics and machine learning help
Efficiencies prioritize those resources as well.

 Challenge: Analyzing large volumes of data takes a large amount of

resources.
 Solution: RegTech uses analytics and AI to identify valuable data
and scrap information that is not helpful. It also allows for the
clustering of information into groups to assess its relevance based
on a large number of factors.
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  Challenge: Organizations need to be able to anticipate
disruptions in the regulatory market.
 Solution: RegTech frameworks provide sensing and horizon-
scanning capabilities that allow organizations to anticipate
problems and sense potential disruptions. In this way industry
shocks and changes won’t catch the organization by surprise.
Improving  Challenge: Organizations struggle to ensure they’re managing
Regulatory potential fraud.
 Solution: AI and machine learning help identify patterns that
Effectiveness could highlight fraud and material errors.
 Challenge: Organizations struggle to react to compliance
requirements quickly and flexibly.
 Solution: RegTech incorporates the use of ‘nudges’, which
strategically communicate obligations to the relevant
stakeholders.

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  Refers to the use of technology to facilitate and enhance
supervisory processes from the perspective of supervisory
authorities.
 SupTech implies the adoption of innovative technology like
AI and Machine Learning by regulators aka supervisory
agencies for supporting supervision.
SupTech  Just like other RegTech solutions, SupTech is focused on
maximizing efficiency by applying automation, optimizing the
operational and administrative operations and by digitalizing
the working tools and data.
 To improve the efficiency, effectiveness, and quality of
financial supervision

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 Artificial Intelligence,

Machine learning,
It involves
leveraging Big data analytics,
tools such
as Blockchain, and

Other emerging technologies

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SupTech

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 SupTech is aimed at helping regulatory bodies and
supervisors to better monitor financial institutions and
mitigate risks.

 It can be used for various purposes, such as

 identifying financial fraud,
Application  detecting market manipulation,
of SupTech  monitoring compliance with regulatory
requirements,
 and improving data quality and accuracy.
 ensure the stability and integrity of financial
markets,
 protect consumers, and
 promote financial inclusion
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 Towards the end of December 2020, the Reserve Bank of
India (RBI) stated that the bank has started making use of
SupTech and RegTech technologies for keeping track of its
Application regulated entities.
of SupTech
The SupTech technology has been centered around two
primary aspects of financial supervision namely, data
collection and data analytics which have been identified by
the Bank of International Settlements (BIS)

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Risks Cyber Risk :

associated 1. With cyberattacks becoming more common and regulators

becoming more vulnerable to them owing to supervisory
with processes now shifting on to digital platforms, the more the
technologies and digital solutions are applied, the more the
SupTech scope and entry points for cyber-attacks expands.

solutions 2. This is particularly owing to varying areas becoming

interconnected and many platforms being shared or disclosed.
Because of these causes, Suptech operations pose the threat of
enhancing the overall susceptibility of the supervisor for cyber
risks.

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 Black Box Issues :

Risks 1. While AI and Machine Learning technology is

capable of producing dependable and intricate
associated insights as long as the input is accurate and the
with output has been verified, use of AI often results in
Black box issues.
SupTech 2. In case of a black box the automated decisions
solutions are undertaken by lengthy and unpredictable
algorithmic interactions which makes it quite a
challenge for the supervisors to be able to gauge
how certain decisions were taken, thus becoming
a hindrance to conducive decision making.

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Risks Legal Risk :
These risks regarding data protection or system inherent biases
associate are likely to arise whenever the regulators start managing a
massive number of sensitive datasets. The use of SupTech
d with raises several issues with regards to

SupTech
accountability.
IT Risk :
solutions There are numerous legacy systems possessed by regulators
which might not have been updated and that might work in a
bubble. Opting for fresh solutions has been made more complex
because of the need of ensuring that they are appropriately linked
through existing systems and there is no data loss.

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Risks Operational Risk :
associated In this world of automation and digitization, any discrepancy in

with
internal systems, procedures or policies owing to fraud or breaches
can have a pretty adverse effect on the regulator’s activities.
SupTech Owing to the high degree of interdependencies between the

solutions
systems and their interconnected nature, any breach in a single
system can lead to a domino effect which can prove to be difficult to
curb.

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 Data-Input Approach

Regulatory Submissions
Uses of and Data Quality Data-pull Approach
Management
Supervisory
Technology
(SupTech) Gathering Intelligence from Dynamic, predictive
Unstructured Data supervision

Reporting Utilities Real-time Access

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Thank You

Any queries?????
Email:
[email protected]