The development of innovative regulatory technology (regtech) has the potential to improve compliance and investor protection but poses a variety of challenges for the securities industry, according to a white paper published Monday from the U.S. Financial Industry Regulatory Authority (FINRA).
The report identifies key areas of innovation, benefits, risks and regulatory consideration.
On the upside, regtech may make it easier for firms to strengthen their compliance programs, the report says, which could create safer markets and bolster investor protection.
At the same time, the use of these tools “may also raise new challenges and regulatory implications” for firms, the report states, including risks for supervisory control systems, outsourcing structure and vendor management, customer data privacy, security risks and others.
The report outlines five areas where firms are using regtech innovations: surveillance and monitoring, customer identification and anti-money laundering compliance, regulatory intelligence, reporting and risk management, and investor risk assessment.
“Regulatory technology is playing an ever-increasing role for broker dealers and regulators must ensure they are keeping pace with industry innovations,” says Haimera Workie, senior director, Office of Emerging Regulatory Issues, FINRA in a statement.
“FINRA’s report provides an initial contribution to our ongoing conversation with market participants about how regtech tools can help enhance compliance efforts in order to keep markets fair and investors safe,” he adds.
The paper is out for comment until Nov. 30.