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28 June 2020 by Dhaher Almheiri CEO, ADGM ADGM Registration Authority
New realities await as we emerge from the shadow of Covid-19, one where digital transformation and disruption will accelerate with greater velocity.
Since our first day of operation, FSRA's DNA is one of a progressive and best-in-class regulator re-imagining financial services regulation, particularly with respect to supporting innovation. Post-pandemic, it is even more critical for global regulators and policy makers to provide leadership in fostering a trusted marketplace for the new economy in terms of digital collaboration, experimentation and adoption.
In the new digital normal, FSRA aims to drive the agenda in three key areas:
1. Digital infrastructure to support collaborative solutioning
We have championed FinTech innovation for the past 5 years, including the introduction the first regulatory sandbox (RegLab) in the MENA region in 2016 that has transformed the FinTech landscape. In supporting innovation, we have also developed sophistication as a FinTech regulator. Amongst others, we learnt that financial institutions (FIs) and FinTechs collaborate better where a regulator is actively involved, providing trust that the solution being developed is compliant by design.
We are tireless in advancing the innovation agenda. A key project that will go live towards the end of 2020 is the transformation of our RegLab from an analogue mode to digital format, placing us again at the forefront of enabling innovation, growth and collaboration. The digital regulatory sandbox (Digital Lab) provides an online marketplace where FinTechs and FIs can co-create and test solutions to address challenges, with direct oversight and engagement by the regulator.
The Digital Lab is a game changer in terms of facilitating digital adoption. Equipped with APIs, digital toolkits and synthetic data sets, it allows FIs to pose problem statements and invite FinTechs and regulators to run and test proofs-of-concept (POCs) with the aim of production. For instance, a bank can utilise the Digital Lab to build a fully digital SME platform anchored on new technology architecture with digital solutions that dynamically structure/restructure loan size and tenure depending on market conditions, needs of customers and evolving credit profile of SMEs.
2. Harnessing RegTech to achieve better outcomes
The financial irregularities involving Wirecard's missing cash is unfathomable given advances in technology especially in the field of RegTech, an emerging field that promises to revolutionise compliance and mitigate risks. There should be more effective solutions to achieve the desired outcome of safe custody of monies instead of dated methods of conducting bank balance verification only during audit cycles.
Harnessing technology allow for better risk management, governance and compliance outcomes for consumers, investors and FIs. At the FSRA, we aspire towards developing solutions for real-time pre-emptive supervision to complement ex-post documentation review and onsite inspections, which have been made challenging during the pandemic.
Exciting RegTech POCs that FSRA has started work on include:
- Utilising APIs to conduct real-time monitoring of funds held by financial firms. The RegTech solution enables reconciliation of client money balances against records of FIs, with the firm and regulator being promptly alerted of discrepancies for remedial actions.
- Compliance tokens facilitating cross-border securities offerings. Tokenized securities offerings through digital channels facilitate capital raising and subsequent trading. Compliant tokenised securities where regulations of multiple jurisdictions are coded into the tokens facilitate cross-border offerings with wider access while assuring that compliance and investor protection concerns of regulators and investors are addressed.
The Digital Lab will serve the RegTech needs of industry participants as well as regulators. It enables participants to interact with rules and regulation through APIs and taxonomies that facilitate better understanding of regulatory context and requirements. Through the Digital Lab, an upstart digital bank can extract all relevant provisions in order to formulate its digital compliance manuals, instead of having to comb through voluminous rulebooks. The firm’s manuals will be updated automatically in the same way new versions of apps are updated in mobile phones whenever the regulator introduces new rules or amendments. FinTechs can validate compliance with security standards via certification tools by plugging into the Lab.
3. Fostering collaboration among the global regulatory community
As the next phase of digital evolution dawns, demand will spike for technological enablers that facilitate digital onboarding and transactions eliminating the need for physical documentation and attributes. These include solutions for:
- Digital ID, transforming interaction between businesses with customers
- Trusted and secure exchange of data with proper consent architecture
- Efficient and safe use of digital assets and financial instruments (e.g. to facilitate credit, payment, insurance)
To support safe deployment, it is important that regulators adopt standards and common approaches in addressing concerns of data privacy and fraud. Greater governmental and regulatory collaboration are needed to develop suitable infrastructures where data can be safely shared across jurisdictions to enhance cross-border trade and the supervision of the underlying financial transactions. Business efficiency will be greatly enhanced if, for instance, a client’s digital ID in a home country can be used to establish a payment account in a host country for trading purposes with suppliers.
In an increasingly connected market, supervisory cooperation among global regulators is imperative. We have seen commendable efforts from the Global Financial Innovation Network (GFiN) in relation to FinTech. It is our hope that the Digital Lab will enable regulators to better connect, test and supervise the cross-border deployment of the next generation of financial services.
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