The RegTech Manifesto
RegTech is a valuable, and growing, industry. MEDICI, which tracks financial industry innovation, expects global demand to reach $119 billion next year. A few RegTech companies founded in recent years have grown fast enough to dominate their markets, acquire legacy companies, and go public.
RegTech companies and their investors focus on providing solutions that help regulated enterprises comply with regulations, especially in the financial industry. In fact, according to some definitions, compliance with financial regulation is all that RegTech is supposed to do.
This focus on a single activity within a single industry is too tight.
First, compliance is just one in a chain of at least six regulatory activities. The greatest changes will come from integrating those activities, not treating them in isolation. Second, industries beyond the financial one are just as ripe for these changes.
Within the next decade, someone will build a comprehensive RegTech platform that integrates all the regulatory activities, uniting multiple solutions to serve regulators, regulated enterprises, and markets in one software environment.
Whoever builds the first comprehensive RegTech platform will use platform economics to achieve far faster growth than any of today’s solution providers have done.
The first comprehensive RegTech platform might focus on transforming the whole chain of regulatory information for one industry—and it probably won’t be the financial industry. But the same platform economics will drive consolidation, and the first RegTech platform will rapidly leap from industry to industry.
Here’s how HData is working to make this happen.
Three Actors. Six Activities. One Chain.
Regulation involves three main categories of actors: regulators, regulated enterprises, and markets. As these actors operate, they generate information and exchange it back and forth with one another.
Compliance is just one activity in a long chain that connects the operations of regulators, regulated enterprises, and markets.
The entire chain includes six major activities: (1) MANDATE, (2) COMPLY, (3) REPORT, (4) ANALYZE, (5) DISSEMINATE, and (6) DIGEST.
MANDATE: Regulators propose rules, finalize them, and impose them on enterprises, wielding authority delegated to them by Congress or state legislatures.
COMPLY: Enterprises review these rules, determine how to follow them, and take the actions that the regulators have mandated, managing their internal processes and data accordingly.
REPORT: Enterprises gather the information that is needed to document their compliance; assemble that information into forms, submissions, and documents as specified by the rules; and transmit those materials back to the regulators.
ANALYZE: Regulators review the materials they receive from enterprises, extract company-specific and industry-wide insights, address noncompliance, and refer potential illegalities for further investigation.
DISSEMINATE: Regulators publish the materials they receive from regulated enterprises (or, sometimes, portions or summaries of those materials) for public use.
DIGEST: Markets receive the regulators’ publications, derive key pieces of information, and reorganize those pieces of information into actionable intelligence to inform investment and business decisions.
Each of the six major activities in the chain converts regulatory information from one form into another, changes its structure, and adds additional information.
Of course, the process of regulation is in reality more complex than a single chain.
First, a separate chain exists for each of hundreds of distinct industries and jurisdictions.
Second, some activities in the chain are informed by later ones. For example, regulators use insights that they gain from the ANALYZE activity to inform future rulemaking in the MANDATE activity. Regulators also purchase packages of actionable intelligence from vendors operating in the DIGEST activity to assist in their other activities. Enterprises, for their part, also purchase actionable intelligence from vendors operating in the DIGEST activity to help make strategic choices on how they present information in the REPORT activity. And many large companies are both regulated enterprises and also observers of other regulated enterprises, occupying both the “Enterprises” and “Market” categories of actors.
But despite these complexities, the chain is a useful way to understand the process of regulation because it reveals that all the activities are interconnected.
From RegTech Solutions to RegTech Platforms
Today’s RegTech solutions create value by simplifying one of the regulatory activities, automating it, or extracting more sophisticated insights or intelligence from it than before.
The conventional definition of RegTech focuses only on the COMPLY activity, but the other activities are properly RegTech.
The conventional definition excludes the opportunity to modernize the regulators’ mandates that drive compliance. It ignores what happens to compliance reports after they are transmitted to regulators. It omits the information ecosystem of regulatory information disseminated to markets, and digested by them.
The conventional definition excludes the opportunity for platform economics. Multi-sided.
Today, RegTech solutions almost always specialize within just one of the six major activities.
This specialization occurs because RegTech providers create their solutions in response to the needs of a particular set of customers--and customers performing each activity are isolated, in important ways, from customers performing the other activities. Regulators must remain independent from the enterprises that they regulate and from the markets for resulting information, which hinders collaboration around the information flows from MANDATE to COMPLY, from REPORT to ANALYZE, and from DISSEMINATE to DIGEST. Meanwhile, even though two major activities happen within regulated enterprises, business functions are often siloed from reporting functions, isolating COMPLY customers from REPORT customers.
A RegTech platform providing solutions for more than one regulatory activity would benefit, as would its customers, from the same economics as the familiar web-based platforms that are beginning to dominate today’s e-commerce, transportation, and hospitality industries. A platform serving customers with solutions for multiple regulatory activities would reduce costs by reducing information asymmetries and managing interactions in a single environment.
For example, if a single platform facilitated both the MANDATE activity for regulators and the COMPLY activity for enterprises, regulators would benefit from the convenience of developing, proposing, taking comment on, and promulgating new rules in the same electronic environment, while enterprises could connect new rules directly into their systems, automating some of the required actions and reducing the need for legal research and compliance consulting services. If a single platform facilitated both the COMPLY activity and the REPORT activity for enterprises, today’s high costs of manually funneling compliance information into regulatory reports would be substantially eliminated. Similar economies would result from any pairing of adjacent regulatory activities.
By the same argument, if a RegTech platform provided comprehensive solutions for the whole flow of regulatory information for a particular industry or jurisdiction, that platform would become an indispensable piece of infrastructure. And if any RegTech platform managed to expand across multiple industries, it would earn a place in the future of the global economy and ensure its lasting relevance.
Comprehensive RegTech platforms are becoming more feasible.
Despite the isolation of customers for each regulatory activity, some of the activities are moving toward data integration. First, some regulators are considering making their rules machine-readable, using open formats, which would allow some of the same solutions to perform both the MANDATE activity and parts of the COMPLY activity. Second, the adoption of standardized data structures for the information flowing from enterprises to regulators means that identical analytical solutions can assist the REPORT activity (for enterprises) and the ANALYZE activity (for regulators).
This summer, Congress will introduce a new version of the bipartisan 2017 Financial Transparency Act, H.R.1530, an important first step to streamlining financial reporting. The legislation will simplify and standardize the information regulated companies must submit to financial regulatory agencies.
The trend toward data integration, driven by the adoption of machine-readable rulemaking and structured reporting, is making comprehensive RegTech platforms--even multi-industry ones--more feasible than ever.
How RegTech Platforms Get Built
The first comprehensive RegTech platform will get built when someone connects all six activities seamlessly together in one software environment.
Regulators will issue mandates in electronic form.
Mandates will automatically connect with regulated enterprises’ compliance processes.
Regulated enterprises’ compliance will automatically generate reports, in the form specified by regulators.
Once regulated enterprises have finalized them, reports will be staged automatically for regulators’ analysis.
Regulators will be able to specify which information from reports is to flow into dissemination, available for markets and the public.
Markets will digest regulatory information seamlessly, as soon as it is available.
for a specific regulatory field—perhaps utilities, perhaps federal grant regulation, perhaps a slice of financial regulation—together into one software environment.
This comprehensive RegTech platform will serve all the needs of the regulators, the regulated enterprises, and the markets in its chosen field. Within this platform:
The technological solutions to perform each of these activities already exist.
One way is to first create a technological infrastructure that can easily integrate with multiple companies’ solutions for multiple regulatory activities, then either build solutions into it or recruit RegTech providers to connect their solutions into that infrastructure.
A second way is more organic. A comprehensive RegTech platform might also be built organically, if more slowly, through a well-planned series of business arrangements--joint ventures, licensing, direct acquisition, etc.--with an array of carefully-selected RegTech providers.
Or, a comprehensive RegTech platform could be built through a combination of these two approaches.
Either way, a platform builder must integrate the right RegTech providers--companies with strong existing capabilities, customer bases, and expertise whose solutions will generate the special economics that make platforms work. Without the right combination of providers and solutions, the platform will not grow. Therefore, the aspiring builder of a comprehensive RegTech platform must build sustainable relationships with a diverse range of RegTech providers. The platform builder has three tasks: (1) source the right RegTech providers; (2) persuade them that they should participate in the platform; and (3) successfully integrate their capabilities into the platform through either an infrastructure connection or a business deal.
Since nearly every one of today’s RegTech providers operates a solution that serves just one of the six activities in the regulatory information flow, and usually just within one industry, no one provider possesses the needed capabilities, customer base, or expertise to become a platform serving multiple activities--much less a comprehensive platform serving all of the activities. Therefore, any RegTech provider or other builder aspiring to create such a platform must combine its own capabilities with those of other providers.
A more difficult problem: no RegTech platform is going to work unless the regulators permit it to. The interconnected nature of the regulatory chain prevents any platform that only serves regulated enterprises from becoming a platform.
Regulators are starting to pay more attention to technology. Regulators understand that they need to modernize.
One way to get regulators’ buy-in is to work with the providers already serving the regulators.
HData is pursuing both of these things.
First, HData’s clients are strategically positioned across the regulatory chain and are taking advantage of regulators’ openness to improvement.
MANDATE: Xcential helps agencies draft and publish regulations in a machine-readable data format.
COMPLY: No current HData clients are operating here.
REPORT: Mission Measurement standardizes grant recipient reporting by grant type.
ANALYZE: Elder Research helps the SEC extract insights from companies’ financial reporting.
DISSEMINATE: JMH Associates is an expert at this.
The future of RegTech is in platforms, and HData’s clients are on the way forward.