The financial industry is facing an unprecedented challenge in complying with complex and ever-changing regulations. According to a report by Thomson Reuters, the global financial sector had to deal with 56,321 regulatory alerts from 900 regulatory bodies in 2019. The cost of compliance is estimated to be around $270 billion per year, and the penalties for non-compliance can be severe.
However, RegTech is not a silver bullet that can solve all the regulatory problems. There are also some potential drawbacks and limitations of RegTech that need to be considered. One of the main questions is whether the rise of stringent regulations inadvertently stifles innovation in the financial industry.
Regulation and innovation have a complex and nuanced relationship. On the one hand, regulation can create incentives and opportunities for innovation by setting standards, addressing market failures, and stimulating demand. On the other hand, regulation can also impose costs and constraints on innovation by creating barriers to entry, reducing flexibility, and discouraging risk-taking. Intellectual property regulations can create monopolies and rent-seeking behaviors that hinder competition and the diffusion of knowledge.
The impact of regulation on innovation depends on various factors, such as the type, design, implementation, and enforcement of regulation, as well as the characteristics of the industry, technology, and market. Moreover, the impact of regulation on innovation can vary across different stages and dimensions of innovation, such as research and development, incremental or radical innovations, product or process innovations, and so on.
A study by PwC found that 54% of financial services executives believe that regulation has increased innovation in their sector. RegTech is one example of how regulation can drive innovation in the financial industry. RegTech allows regulators to monitor the market in real-time, detect risks and trends, communicate more effectively with regulators and stakeholders, and detect emerging risks.
However, RegTech is not a panacea that can solve all the regulatory challenges. There are still some trade-offs and limitations that need to be considered.
Regulation and innovation are not mutually exclusive, but rather interdependent. Regulation can both enable and constrain innovation, depending on how it is designed and implemented. Innovation can both comply with and challenge regulation, depending on how it is developed and deployed. It also requires a continuous learning and improvement process, where feedback loops are established, best practices are shared, and lessons are learned.