Regtech Research with Ben Charoenwong | E263
How technology has supported regulatory reform.
On today's episode of the Fintech impact, Jason is going to talk to Professor Ben Charoenwong, an Assistant Professor in Finance at the National University of Singapore. Today Ben is going to talk about some research he has done specifically in the RegTech field. Ben explains how dealer broker firms would not have wanted to invest in all these technologies on their own, it's the fact that there are some regulations that kind of forced them to get software.
Episode Highlights
1.40: RegTech is short for regulatory technology or software that is designed specifically for the purpose of improving or assisting with compliance with rules and regulations.
2.20: A lot of RegTech from the economic side, looks like something that improves internal controls, improves monitoring, and improves the information environment within a company, says Ben.
3.26: Ben says that they have a paper that studies the implementation of a rule passed by the SEC called rule 17A-5, and the statement of the rule is not so much that they are changing the rules, it's just that now the CEO or the Managing Director or someone with someone who's an officer in the firm, must sign and attest that they are in compliance with other rules.
6.09: At the end of the day, everything is all about liability and the only way to make companies accountable is to make them liable, says Jason.
7.28: The SEC 175-a rule came effective in second half of 2013, and it says you must segregate your customers assets and that is the moment-to-moment component. You must always have your minimal capital, so you don't just randomly disappear, and your auditors have to attest to it, says Ben.
9.00: When you look down the list of like the top 20 broker dealers, it's a mix of whether they are caring or not a lot of this business line of having custody.
11.04: There are many proprietary software solutions for document handling and storage that jumped about 30% when this rule was signed and started to be implemented and there is just a dramatic jump in the firms adopting the software solutions.
12.44: Ben saw an almost exact equivalent jump on the hardware side. The estimated IT budget for each company increased by about 30 to 40% and consequently the profitability of these firms increased by about five percentage points.
15.23: Ben says that the complementary thing we saw was, as firms were adding in this data management software, they also seemed to increase investments in customer relationship management software.
17.12: The companies with better tech started hiring more people and specifically not just more people overall from college, they hired more people from their competitors. They seemed to attract high quality broker dealers who are good at the relationship management.
19.14: The most profitable per dollar of revenue firms that exist at this point are typically sole practitioners running at a high level of automation and it's interesting.
24.04: Ben talked about his research, and did he complete any form of causation like was it the elimination of bad actors or we could just attribute this to a Hawthorne effect?
26.08 Ben says that we can't quite estimate the cost of trust. Most people believe it's huge because there is a big spill on effects. One bad act like FTX can make everyone lose trust in the entire crypto industry.
27.35: If you think about this SEC 175-A rule it is very basic and just says, all these other financial regulations, just can you comply with them always.
3 Key Points
The main thing about customer asset segregation is that the brokers that were not carrying or using other brokers as custodians, that was fine because that's a third party and it's very hard to steal customer assets when it's sitting with someone else, says Ben.
Realistically companies looked at SEC rule that basically talks about banking versus investing and they must have thought immediately like we need a software solution. James explains what he saw in terms of the implementation and its efficacy of it.
The technology component seems to have the operational effect that's almost equivalent to like having the FBI come check the firm, says Ben.
Tweetable Quotes
"In the face of increasing regulations in the financial services sector, it's become fairly difficult for humans to actually make sure they are in compliance." – Ben
"You always have all the independent parties who are making decisions as to how things are to work." - Jason
"A lot of these broker dealer's companies came into existence is mostly through historical coincidence where they just kind of had merged with other holding companies, other financial services." – Ben
"It's a known phenomenon that computers tend to not get scrapped, they trickle down for a long period of time until they're useless." – Jason
"The entire financial industry is based in trust and anything we do that erodes trust, eliminates and takes people out of the market and anything we do to improve that brings them into it." - Jason
"I don't think regulation is going anyway anytime soon. It's going to increase even more."- Ben
Resources Mentioned
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