The RegTech Manifesto

Today’s RegTech solutions apply new technologies to old-fashioned activities. True transformation will only begin when regulators, regulated enterprises, and markets work together to integrate those activities, moving from solutions to platforms. That is HData’s mission.

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 technological transformations will come from integrating those activities with one another, not treating them in isolation. Second, industries beyond the financial one are just as ripe for the transparency, efficiency, and new insights that technological transformation tends to bring.

Within the next decade, someone will build a comprehensive RegTech platform that integrates all the regulatory activities for a particular industry or field, uniting multiple solutions into a single software environment that serves the needs of regulators, regulated enterprises, and markets.

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 will probably 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, which means 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—the tight focus of most of today’s RegTech companies—is just one link in a long chain that connects the activities of regulators, regulated enterprises, and markets.

This chain is made of at least 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.

Current: Disconnected Solutions

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, and usually only within the financial industry, but the other activities, too, 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.

In sum, the conventional definition ignores the opportunity to integrate all the regulatory activities; simultaneously serve regulators, regulated enterprises, and markets; and take advantage of platform economics for speedy growth and disruptive transformation.

Why do today’s 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 integrating solutions for more than one regulatory activity would benefit, as would its customers, from the same economics as the familiar web-based platforms that now 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 entire chain of regulatory activities for a whole 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.

RegTech platforms will mean better results for all of the constituencies of regulation, starting with the public interests regulatory policy is intended to serve. Platforms will create better transparency, eliminate manual steps that imperil accuracy, and reduce the influence of experts as gatekeepers. Moreover, the use of platforms to integrate regulatory activities is agnostic to ideology: platforms can handle the whole spectrum of intensity from deregulation to tight control, offering better efficiency for any combination.

(The concept of a RegTech platform does, however, require that regulated enterprises are not under state control and that regulators remain independent of the industries that they regulate.)

Future: Comprehensive RegTech Platforms

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 both the Report activity (for enterprises) and the Analyze activity (for regulators).

This month, supporters in Congress will introduce a new version of the bipartisan Financial Transparency Act,  an important first step to streamlining financial reporting. The legislation will integrate the data structures for all 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 under reforms like the Financial Transparency Act, is making comprehensive RegTech platforms, even including multi-industry ones, more feasible than ever.

How RegTech Platforms Will Get Built

The first steps toward comprehensive RegTech platforms will take place through the integration of solutions for adjacent activities: Mandate solutions integrated with Comply solutions, Comply with Report, Report with Analyze, and so forth.

And the first fully comprehensive RegTech platform will be born when someone connects all six activities seamlessly together in one software environment. In this 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 seamlessly into dissemination, available for markets and the public.

• Markets will digest regulatory information instantly, as soon as it is available.

The first comprehensive RegTech platform will unite all of the regulatory activities of a specific industry or jurisdiction: perhaps utilities, perhaps federal grant regulation, or perhaps a slice of financial regulation.

This comprehensive RegTech platform will serve all the needs of the regulators, the regulated enterprises, and the markets in its chosen field.

How can a RegTech company try to move from providing solutions to offering an indispensable platform?

Since nearly every one of today’s RegTech providers operates a solution that serves just one of the six activities in the chain, and usually just within one industry, no 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. 

One way is to first create a technological infrastructure that can easily connect multiple companies’ solutions for multiple regulatory activities, and then recruit other RegTech providers to connect their own solutions into that infrastructure.

The second way is more organic. A comprehensive RegTech platform might arise through a well-planned series of business arrangements—joint ventures, licensing, direct acquisition, etc.—connecting an array of carefully-selected RegTech providers.

Or, a comprehensive RegTech platform could be built through a combination of these two approaches.

A more difficult problem arises: no RegTech platform is going to work unless the regulators permit it to. The interconnected nature of the regulatory chain prevents any provider that only serves regulated enterprises from making the leap from solutions to platform. Fortunately, regulators are starting to pay more attention to data integration, driven in part by external policy reforms like the Financial Transparency Act and in part by internal vision.

HData is working toward a platform future for RegTech.

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 which can support computation-ready mandates.

• Comply: No current HData clients are operating here, but we continue to recruit new clients.

• Report: Mission Measurement standardizes grant recipient reporting by grant type.

• Analyze: Elder Research helps the SEC and other regulators extract insights from companies’ financial reporting; Legistek’s litigation preparation platform, Limine, is ready to accept structured data submissions.

• Disseminate: JMH Associates offers world-class expertise in the kind of open-source open data platforms that can handle comprehensive, controlled regulatory data publication.

• Digest: Both Intrinio and idaciti deliver machine-readable regulatory information to financial markets—helping investors efficiently back the best-run businesses. OpenCorporates has built the world’s largest open database of corporate registration. Glyphic Software discerns data structure from PDFs;

By assisting these clients in building their existing businesses, HData is helping to create a cohort of RegTech solutions that all have the needed capabilities, customer bases, and expertise to become part of future platforms.

By helping its clients pursue integration with one another’s solutions where it makes the most sense, HData creates partnerships that will form the foundation for platforms.

And by working with regulators to develop aspirations for how platforms could bring better efficiency and transparency, HData is helping to ensure that the necessary regulatory buy-in will be present when it is needed.

In short, HData’s mission promises a pathway from solutions to platforms—and a better future for all participants in all fields of government reporting and regulation.