Regtech: a New Frontier in Legal Scholarship

Vicki Waye - University of South Australia

-- The engagement of regulated entities with regulation and regulators can be aptly described using the black box metaphor. We can see the inputs of regulation and to a limited extent we can see the outputs of regulatory enforcement, but given the lack of access to data it is difficult to understand how regulations are assimilated and implemented within firms, within economic sectors and/or across the economy. As Ian Ramsay and Miranda Webster reason (ASIC Enforcement Outcomes: Trends and Analysis) this regulatory data deficit can considerably hamper the work of legal scholars seeking to analyse the efficacy of the law and regulatory practice.

In Regtech: A New Frontier in Legal Scholarship I explore how the advent of Regtech may enhance opportunities for legal scholars and assist in filling the regulatory data void. Regtech has been driven by demand for automated compliance systems arising from huge increases in regulatory complexity and burden, particularly in the finance sector. It comprises tools that combine Web 4.0 applications such as robotic process automation, artificial intelligence, internet of things and distributed ledger technology in an effort designed to deliver better, more standardised compliance at a lower cost than traditional manual compliance systems.

Whether Regtech does deliver better regulation and better management of regulatory risk constitutes fertile ground for future legal scholarship. I therefore examine how Regtech might potentially impact upon overlapping methods of legal scholarship including doctrinal, normative, theoretical, interdisciplinary and empirical forms of research.

Firms faced with a plethora of interdependent and ever changing regulation are clearly interested in developing a coherent and effective compliance response and are therefore highly dependent upon doctrinal research outputs to understand the nature of their legal obligations. Legal researchers are also interested in synthesising and analysing the many thousands of cases, laws and regulations that may apply to those firms. Experiments applying artificial intelligence to the task such as an experiment involving an analysis of the European Markets in Financial Instruments Directive II demonstrate that Regtech has the potential to perform doctrinal research at a much faster pace and with a higher degree of accuracy than human researchers. Using topic modelling techniques, Regtech can also extend doctrinal research by identifying the significance of factors underpinning regulatory decision making that may not be readily apparent. Nevertheless, currently there are significant limitations that indicate that Regtech can only work in tandem with human researchers. These limitations relate to the inability to make artificial intelligence responsive to values embedded in the legal system and to respond to developments that lay outside of the precise instructions of Regtech programmers. Consequently, that also means that while Regtech may enhance the ability of legal researchers to engage in normative analysis it cannot fully address normative problems that they may analyse in their research such as whether particular forms of know your customer verification may adversely affect people from socially disadvantaged communities.

Given the necessity of understanding how Regtech performs, it is inevitable that legal scholars studying regulation will need to collaborate with a range of parties including business information experts and computational experts. As Regtech enables the analysis of connections between the law and other socio-economic trends it is also likely that its adoption will further drive an increase in interdisciplinary work, which, in turn, will assist theory building regarding how regulation works. However, although Regtech will assist legal scholars in these endeavours it is not capable of generating grand theories like Calabresi and Melamed’s theory of liability, and so legal scholars will continue to play a significant role in developing causal explanations of regulatory phenomena. It is also important to note that Regtech data may be affected by framing and bias. Legal scholars will therefore continue to be critical for explaining Regtech’s limitations.

Regtech thus has the capacity to greatly enhance understanding of how regulation works and provide more fuel for legal researchers and their interdisciplinary colleagues to interpret and comment upon the regulatory impact.

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