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Technology Based Regulation

The Financial Services Authority (OJK) and the Indonesian Chamber of Commerce and Industry (Kadin) recently held a large meeting and exhibition that showed the progressive movement toward the development of the Fintech Ecosystem. Indonesia Fintech Festival and Conference 2016, from Aug. 29th to 30th, can provide a remarkable impact on improving awareness of the people in the Fintech industry.

Gaining awareness of Fintech amongst technopreneurs might be an important agenda for OJK and Kadin, as both institutions want to improve financial inclusion by developing a wider variety of forms of Fintech business and enhancing involvement of technopreneurs to broaden the Fintech industry.

However, regulatory aspects can also be considered as another approach to broaden and deepen the Fintech industry. Technology startup firms have already changed the way people do business in a massive way. Fintech, highlighted as a form of technology-based business in the financial sector, undeniably disrupts the entire conventional financial services industry with its high level of rigidity.

However, Fintech firms still adhere to the same roots as the conventional financial sector as they deliver services that require trust from customers. Under this circumstance, regulation in the Fintech industry is still essential to guide the way technopreneurs develop the Fintech business, assuring that it aligns with customer protection.

The process of formulating the regulation has been taking quite a long time since the Indonesia Fintech Association was established in September 2015. Considering Fintech as a game-changing movement for the financial services industry, formulating efficient regulation is indeed really challenging. However, setting up the regulation, not particularly in the Fintech industry but generally in the financial services industry, has never been easy.

A review regarding Economic Regulation by D. Parker ( 2002 ) explains thoroughly the aspects of efficient regulation, the challenges to formulate efficient regulation and the impact of regulation on business. His review stated that regulation is a complex balancing act between advancing the interests of consumers, competitors and investors, while promoting a wider, “public interest” agenda.

Techno-business will surely impact how the regulation environment should adapt to business. In this kind of dynamic business environment, where government intends to encourage more people to be innovative technopreneurs, the regulation should be built not merely based on consumer interest, but also based on startups’ business perspectives.

To support my opinion, Parker pointed out in his review that the objective of regulation should be to protect the consumer, while providing an environment where the industry can invest with a high degree of confidence that profits legitimately made are not eroded by vexatious regulation.

Parker also mentioned of a well-functioning regulatory structure. He noted that such a structure should give regulators a space to use their judgement for discovery and learning as the market changes. But at the same time, a well-functioning regulatory structure avoids high levels of regulatory risk. A new problem might arise as the techno-business environment changes rapidly from time to time. Business demands regulation to be more adaptive.

This could possibly increase regulatory risk. Higher regulatory risk leads to higher cost of compliance. Hence, in my opinion, regulators should seek a new ideal approach that can fit and support business to grow, in terms of formulating and delivering the regulation to be implemented efficiently. Following the development of current business trends, the regulatory environment will eventually be incorporated into technological innovation, as the needs for more adaptive and efficient regulation increase.

The review from EY’s (Ernst and Young) 2015 Global Governance, Risk and Compliance Survey titled “Innovating with Regtech, Turning Regulatory Compliance into a Competitive Advantage” stated that more stringent requirements within increasingly dense data landscapes and the rapidly evolving Fintech sector have led firms, technology providers and regulators to focus on new technologies to meet regulatory challenges.

Further, the review stated the rise of the new form of innovation called “Regtech”. Particularly in the UK financial services industry, Regtech gains popularity among financial service industry players.

Citing EY’s review ( 2015 ) further, “Regtech” is defined as the adoption of new technologies to facilitate the delivery of regulatory requirements. Regtech will simplify regulatory compliance in many ways by standardizing the compliance process, continuously seeking solution for more flexible risk management framework, automatically linking controls with risks and deepening data analytics, which will lead into better management information.

In other words, Regtech creates a competitive advantage for business by formulating a new form of risk management framework and simpler way of regulatory compliance utilizing technology innovations.

Taking the capital market industry as an example, “form over substance” is still becoming the main issue in regulatory compliance. In the compliance monitoring process, regulators, such as the Indonesia Stock Exchange (IDX), OJK, and the Indonesian Central Securities Depository (KSEI), still depend mostly on administrative paper documentations, which can be easily manipulated by exchange members.

Meanwhile, on the opposite side, exchange members have to maintain really efficient costs for regulatory compliance — moreover under the market downturn scenario. Once exchange members feel that the regulations are already outdated or can no longer support their business, the regulatory compliance will only be a formality. They tend to seek a “loophole”, and exploit it to relax from regulation.

Day-to-day regulatory compliance in the financial services industry is not an easy task. The challenge is not only for firms who become the object of regulation, but also for regulators, in a way of assuring and monitoring that regulation has been implemented as it should be.

Perhaps the development of Regtech is not merely seen as disruptive in the regulatory environment, but also as a revolutionary way to create a stronger and more sustained Fintech industry, improving efficiency in the conventional financial services industry as well.



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