Moral hazard. A phrase that permeated the post Global Financial Crisis (GFC) discourse but has since all but disappeared. In brief, a moral hazard is where an agent is given the implicit guarantee of support in the event of making a loss. Sound familiar? The well documented confluence of events that led to the GFC were in large part made possible due to the rise of moral hazards across the sector. For example, "too big to fail" gave some banks free reign to take unchecked risks knowing that they would be bailed out by governments as their failure would have been too calamitous for the industry. Another example was the treatment of mortgage debt where bad and good loans were collateralised, underwritten and resold in secondary markets meaning institutions didn't end up having to bear the ongoing risk associated with the products they originally packaged up and sold.
We all know what happened next - regulation was revamped and made more stringent to prevent 1) the current crisis from worsening and; 2) another credit/liquidity crisis emerging. As Financial Services Institutions (FSIs) scrambled to bolster balance sheets and compliance departments, regulators began to realise that there was another issue at play here - infrastructure. During times of high volume and high margins, processing was pretty much siloed and that sort of worked. However, as margins got squeezed due to the sustained drop in interest rates the inability of banks to read across their organisation became clear for all to see. Their technology, a mix of old and poorly configured new, simply didn't support it.
Out of the new flurry of regulation was born the notion of regulatory technology (RegTech). If we consider FinTech to be the umbrella phrase for all new technology related to the financial services, RegTech can be considered a subset of this and defined as any technology used to assist in the delivery of compliance. Within RegTech there are further segments such as:
Regulatory Reporting (which we focus on)
KYC/AML/CFT
Compliance (again, we operate in this space)
Digital ID
Fraud monitoring and control
Moral hazard has many roots. It would be quite inaccurate to suggest that RegTech can address something which has many other root causes (conduct and culture in particular). However, regulatory technology can be used to apply control, precision and transparency over activities which could generate a future moral hazard or some other form of regulatory exposure. By implementing harmonised data collection across supervised organisations, regulators will get a much better view of the sector and a determination of where future risks lie. By enabling technology to support and aggregate the data generated from regulated activities, institutes get better control over their own risks but also the internal assurance they need to ensure that they are not contributing to any new and emerging risks.
In essence, a key question that all RegTechs should be asking themselves is: "are we reducing the possibility moral hazard or market failure?" We think that this should be brought back into the discussion.
How can we help?
Compliance as a Service is a RegTech reporting company that helps institutions to deliver regulatory compliance via leading edge technology. We also believe that RegTech has a key part to play in protecting the financial services industry and ultimately society. Contact us to find out more.