The emergence of “RegTech” enforcement
The modern era of enforcement has arrived, with securities regulators across Canada and the world increasingly relying on technology to pursue their mandates.
As these trends continue to facilitate regulation and drive enforcement activity, we are seeing a more nimble and effective approach to protecting the capital markets emerge, known broadly as “RegTech.”
RegTech is a catch-all term that refers to the use of machine-learning software and other technology to bolster regulatory compliance. Heralded as “the new FinTech,” RegTech has rapidly risen to prominence over the past year, as regulators rely on it to monitor compliance and institutions use new products to be compliant. To encourage the development of RegTech in Ontario, the Ontario Securities Commission established a LaunchPad in 2016. The Canadian Securities Administrators also created a regulatory sandbox in 2017 to provide guidance and administrative support to FinTech and RegTech firms with “a flexible approach to fulfilling regulatory requirements.” The goal is to allow firms to test new technology without the full burden of regulatory regimes, while giving the OSC and CSA access to the information stored by these large data-gathering firms.
International and domestic cooperation
Other countries have introduced similar initiatives. The UK’s securities regulator, the Financial Conduct Authority, launched the Global Financial Innovation Network in 2018 to create a global “regulatory sandbox.” As of June 2019, 35 financial services regulators and seven observers, including the IMF and World Bank, had joined GFIN, along with the OSC, Quebec’s Autorité des marchés financiers, and the securities commissions in British Columbia and Alberta. Firms that are admitted to testing products through GFIN have a six-month trial period to convince regulators that their technology should be introduced to a given market.
These recent efforts signal a recognition among securities regulators that cooperation is key to enforcement. Participation in GFIN will facilitate data sharing and “create easier cross-border navigation for innovative firms.” In 2019, the OSC made efforts through its seat on the International Organization of Securities Commissions to collaborate in the regulation of new financial technologies such as crypto-assets and initial coin offerings. It is also working with the U.S. Securities and Exchange Commission to scrutinize short-seller practices in violation of securities laws.
A major part of the RegTech market relies on AI and machine learning technology. Spending on AI reached $19.1 billion in 2018 and is expected to grow to $52.2 billion in 2021. Securities regulators have begun to embrace it. The Australian Securities and Investments Commission is currently funding studies and pilot programs that employ AI to analyze speech and text to identify patterns in misconduct. Its pilot programs use this technology to scrutinize financial planning documentation, online promotions, and advertisements to ensure compliance with current regulation. In the U.S., the SEC has also begun incorporating machine learning programs for market risk assessment and for identifying potential fraud and misconduct.” In recent years, Canadian securities regulators have introduced new digital tools to analyze large data sets with dedicated enforcement teams focused on advanced analytics. Also, Canadian securities regulators are currently working on launching a new data repository and analytics system, the Market Analysis Platform (MAP), an automated centralized analytics system to more efficiently analyze large amounts of data and identify securities misconduct.
What are the impacts?
The hope is that these collaborative efforts “lead to improved supervision, better regulatory models, and ultimately better products and services.” Still, there is good reason to approach the rise of RegTech with caution. The mandate of global organizations such as GFIN has drawn criticism for being too broad and ambitious. There are concerns that setting up a global sandbox might require coordination that is not achievable within a reasonable time frame. Moreover, relaxing regulatory restrictions for large data-gathering firms could produce unintended consequences and jeopardize investor privacy.
Current trends in securities enforcement in Canada suggest that regulators are prioritizing efficiency in the way they monitor and regulate capital markets. Developments, such as the increased adoption of RegTech, demonstrate a desire to reduce the cost of monitoring and enforcement to pursue a greater number of regulatory breaches by market participants. In the coming years, we can expect to see increased use of these new technologies, which will facilitate domestic and international cooperation and enhance securities enforcement mechanisms in Canada.