RegTech and the New Era of Financial Regulation
The rise of FinTech has not only advanced operational efficiency of the financial industry but also posed challenges to regulatory efficiency. There is a growing consensus on the importance and urgency for financial regulators to enhance their capacity through the use of RegTech. RegTech is widely considered as holding a great potential to facilitate the supervisory process and enhance the regulatory compliance. The current study of RegTech, however, remains in its infancy. Most of the literature identifies and stock-takes different technologies and discusses how to apply them to facilitate financial regulation and supervision. These studies, in our view, mainly focus on the conduct aspect of RegTech. Of equal importance, yet largely overlooked, is the organizational aspect of RegTech, that is, how the organizational design and culture of a financial regulator affects its capability and suitability for applying RegTech to facilitate financial regulation and supervision.
In our paper “RegTech and the New Era of Financial Regulators: Envisaging More Public-Private Partnership Models of Financial Regulators” published in University of Pennsylvania Journal of Business Law, we attempt to fill this gap by offering more insights on how to organize the institutional design of a financial regulator to ensure its accountability, flexibility, and adaptiveness in the era of RegTech. We argue that such a regulator requires the character of a public-private partnership, which should contain some public elements to ensure the unbiasedness of financial supervision and some private elements to adapt to rapid technological changes. We firstly conduct a comparative analysis of the worldwide organizational models of financial regulators, by which we identify four major types, namely, the government agency model, the government corporation model, the self-regulatory organization model, and the delegated gatekeeper model. We then compare the different public-private relationship between them based on five main characteristics, namely, competition, profit orientation, decision process, pay level, and public accountability. We observe that the more privately-oriented a financial regulator model is, the more such model prevails in the first four characteristics in the sacrifice of public accountability. The institutional design of a financial regulation, thus, is an art of trade-off between these organizational characteristics.
On the basis of the above comparison, we apply the analytical framework of Transaction Cost Economics, particularly the Theory of the Firm and the Comparative Institutional Approach, to theorize a spectrum of public-private-partnership for different organizational models of financial regulators, ranging from a firm-type of partnership to a contract-type of partnership. Based on this theorized spectrum, together with the Comparative Institutional Approach, we identify four more possible models of public-private-partnership that may help financial regulators streamline their organizational structure to promote the adoption of RegTech. These models include a mixed ownership RegTech corporation, a contracted RegTech supporter, a quasi-public financial regulator, and directly delegated gatekeepers. While we do not claim the superiority of any model to others, our analyses delineate a theoretical foundation for financial regulators across the globe to consider a model that suits its own regulatory and supervisory needs.
In the era of RegTech, financial regulators need innovation in not only the design of regulation and supervision but also the organizational models of those who carry out such regulation and supervision. The success of RegTech development depends not only on the adoption and application of new technologies but also on the organization and people running the RegTech solution.
Yueh-Ping Yang, National Taiwan University, Taiwan
Cheng-Yun Tsang, National Chengchi University, Taiwan