The Fundamental Shift to RegTech and Data-Driven Finance ( TechFin )

1. The Fundamental Shift to RegTech and Data-Driven Finance (TechFin) Ross P BuckleyKPMG Law – KWM Professor of Disruptive Innovation, UNSW Sydney

2. Overview Organisingidea – The entitythatknows the most about youis best placed to pricecredit or insurance for you. Traditionallythat has been yourbank. Yourbankdidthat by beingembedded in the community – the local manager watched and heardthings. Increasinglybanks have become data-driven businesses. So it has been decadessincemortgagedecisionswere made locally. But nowothercompanies know more about you – principally the big data and platformcompanies – Google, Amazon, Facebook, Apple, etc. Banks need to become far more nimblewith data, or face beingusurped. In this sense mandating open banking (over their objections) may save the banks lives.

3. Client Relationship(Fin) Big Data(Tech) Financial Services

4. TechFin – Stage One TechFins provide much of the data – either raw or analysed – that banks and insurers use.

5. TechFin - Stage Two TechFin “Customers” Conduit Financial institution

6. Knowing your preferences from multiple sources… • Website / data: google (interestpreferences), facebook (socialmediapreferences) etc • Shopping: amazon, woolworths/colesfrequentshopper (shoppingpreferences) • Phone: m-pesa (communicationpreferences) • Payment: alipay, visa/mastercard (shopping, travelpreferences) AllowsAlgorithmstoknow so muchaboutyou. Data analyticsrules! Walmart – chokerchainfordog, orstopperfor a door. Multiplythesecorrelationsbytensofthousands!

7. The monetization of Data – The clear global trend, following China’s lead. Money has been Digitized and Now Data is Monetized TechFin Tomorrow FinTech Today

8. China Influencing Business Decisions via Social Credit Scores China's Social Credit System: AI-driven panopticon or fragmented foundation for a sincerity culture? – Masha Borak

9. Start Source: Study: less than 1% of the world's data is analysed, over 80% is unprotected – J. Burn-Murdoch • Than 1% of the world’s data is analyzed, • over 80% is unprotected

10. When does a TechFin become a Financial Insitution? Our thesis is that most TechFins will begin serving as a conduit connecting their customers with financial service providers ? : Conduit / front-end only? Data delivery & analytics? • Ant Financial <> Alibaba • Tencent <> WeBank • Google pay • Vodaone <> m-pesa • Large size, international / cross-border activity • Network fullydeveloped • Enormousaccesstodata (+): money on balance sheet; discretion over client money; solicitation, pooling

11. TechFin – Stage Three Stage Three, obviously, isTechFinsprovidingfinancialservicesthemselves, asishappeningtoday on a majorscale in China withAnt Financial.

12. TechFin Benefits • Reduction of transaction costs & enhancedmarketefficiency • Enhanced business decisions, risk management • Business decisionsbased on more comprehensive data set Existingfinancialsystems serve the creditneeds of SMEspoorly So better SME & consumer credit

13. TechFin Risks • TechFins have better data thantraditionalbanks: more comprehensive front-end data, more data points, more reliable, cross-checked data • But: no levelplayingfieldwithexisting institutions, and a risk the triggers for existingregulationwon’tbeactivated in time • CorrelationvsCausation: FalsePredictions -- unkowneffectsofArtificalIntelligence / Data Analytics • ProtectedFactors at Risk? UpholdingCivil Society Values (forinstance, enforcing anti-racism, anti-gender discriminationetc) • Monopoly risks • Data protectionrisks – asweareseeingglobaly • In counteringtheserisksRegTech has a major role!

14. Should Regulators Care if TechFins Only Provide Data & Analytics? • If TechFins are essential to stabilityregulatorsshould care. • If TechFinis essential for one or more important banks (eg main data analytics provider) • If TechFin moves to Stage 2 and is main front-end channel to customers, or if a TechFin serves thisrole for multiple providers. • Furthermore, if individuals are beingharmed by analyticsthatproducedamagingresults, regulatorsshould care. • So thereis a strong case here for public regulation of TechFins. And RegTechwillbe essential in thattask.

15. Theses • TechFins have their origin in BigData (“Tech”) rather than customer relationship (“Fin”). • For TechFins, formal financial regulation may be triggered too late. Triggers linked to taking deposits, soliciting customers or handling client funds are likely to not be triggered. Regulators may therefore be unable to a) enforce customer protection measures and b) monitor and mitigate systemic risk. • TechFins may compete unfairly therefore since they a) are unrestricted by risk & compliance considerations in their build-up phase, b) do not bear compliance and capital costs. • TechFins’ data analytics will require regulation at some stage. Perhaps “follow the data” will have to replace financial law’s “follow the money”. • Regulation of TechFin for now should focus on: a) information gathering, b) review of algorithms for false predictions and protected factors, and c) systemic risk prevention.

16. The Full Paper… Dirk A. Zetzsche, Ross P. Buckley, Douglas W. Arner & Janos N Barberis “From FinTech to TechFin: The Regulatory Challenges of Data-Driven Finance,” forthcoming New York University Journal of Law and Business, https://ssrn.com/abstract=2959925. See also: On the evolution of FinTech:https://papers.ssrn.com/abstract=2676553 On the transformative potential of RegTech:https://papers.ssrn.com/abstract=2847806 On the distributed liability of distributed ledgers: https://papers.ssrn.com/sol3/abstract=3018214 On Initial Coin Offerings: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3072298

17. Thank you. Ross Buckley ross.buckley@unsw.edu.au