The Evolution of Financial Regulation
Digital financial services have revolutionized access to banking and payments, reaching more people than ever before. However, this rapid expansion presents challenges for financial sector regulators who must efficiently fulfill their licensing, supervising, and oversight duties at an unprecedented scale. Modern technologies offer a solution by streamlining regulatory processes, enhancing decision-making, and scaling oversight capabilities to address the growing complexity of globally connected economies.
Regulators can leverage Supervisory Technology (SupTech) to combine innovation with resilience, efficiency with integrity, and modernization with public trust. By utilizing cloud services, supervisors can rapidly deploy new supervisory tools, adapt to emerging financial risks, and efficiently process vast amounts of regulatory data while maintaining the highest standards of security and operational resilience. Cloud technology provides the necessary agility and cost-effectiveness to keep pace with the rapidly evolving financial sector.
To achieve enhanced resilience and operational excellence in cloud-based supervisory systems, supervisory authorities can implement the shared responsibility model with their cloud service provider (CSP). This model delineates security and operational accountabilities between both parties, ensuring a robust and secure regulatory framework.
A white paper produced by the Alliance for Innovative Regulation (AIR), supported by Amazon Web Services (AWS), offers guidance on implementing SupTech. The report, titled ‘Beyond Pilots and Sandboxes: Regulatory Innovation through SupTech Case Studies and Leading Practices,’ recommends five steps for success:
- Start with a clear vision
- Develop robust data governance frameworks and analytics capabilities supported by investments in modern cloud-based data platforms and talent
- Collaborate internally and externally on innovation
- Work iteratively and leverage agile methodologies
- Balance innovation with security and resilience
The paper outlines ten core capabilities required for regulators to effectively supervise, monitor, and manage risks in the financial services sector. These capabilities range from licensing and case management to investigation and enforcement of regulatory violations. For instance, regulators can leverage technologies such as optical character recognition (OCR), natural language processing (NLP), and generative AI capabilities like large language models (LLMs) to transform document review and analysis.
The Australian Securities and Investments Commission (ASIC), Australian Prudential Regulation Authority (APRA), and the Reserve Bank of Australia (RBA) recently collaborated with AWS to build a generative AI proof of concept (PoC) solution. This solution demonstrated promising results, achieving up to 93 percent confidence in some model outputs using publicly available documents. Such innovations provide a glimpse into the future of regulatory practices and financial oversight.
SupTech solutions can significantly enhance regulatory reporting and data collection by automating processes, applying advanced analytics, and ensuring seamless integration. This enables regulators to process vast datasets efficiently while maintaining data quality and compliance. For example, the Financial Industry Regulatory Authority (FINRA) operates a sophisticated cloud-based system that oversees US brokerage firms and exchange markets, processing over 100 billion daily market events.
The report concludes that ‘the road to a fully modernized regulatory framework is challenging but achievable.’ Through strategic investments, thoughtful technology integration, and a commitment to public trust, regulators can position themselves as stewards of a future-ready financial system capable of navigating the complexities of the digital age.
