Inputs on the ABS-CBN News Channel on the Money Guide Questions

4.12.2019
IPSD - MSRD

f. “with all your Fintech training and experiences abroad, how can the SEC utilize innovative
technologies to further improve its services”

PROPOSED TALKING POINTS:

I. Commission’s Initiative
II. Other RegTech and SupTech ideas for considerations to address the flurry of new business
models, products and services based on technological innovations, commonly referred to as
Fintech.

 The rise of FinTech raises questions to financial authorities, such as whether to expand
the regulatory and supervisory perimeter; whether new types of digital financial services
fit existing regulations; how to identify, monitor and mitigate the risks of FinTech
innovations and FinTech firms.1
 In this regard, just as FinTech is introducing changes to the way in which market
participants offer their services, so too RegTech and SupTech will alter the way in which
financial institutions and regulators respectively comply with the rules and supervise
markets. In so doing, these technologies have the potential to reshape the relationship
between regulators and market participants.2

The Commission’s take on this is:

“Technologies may change but the main investor protection principles – KYC, AML, Transparency,
Price discovery, Public disclosure, Suitability, Fiduciary responsibility – remain.”

Conclusion:
From the report3 provides a great perspective:

“The current regulatory, supervisory and market landscape for financial authorities is highly
complex and fast changing. Regulations have been revamped in the aftermath of the financial
crisis to deal with weaknesses in conduct and risk management, and to increase supervisory
effectiveness. In parallel, and in part as a result, a wave of FinTech innovation is sweeping the
globe, introducing risks related to new technology, business models and new products and
services. But FinTech also has significant potential to contribute to objectives such as increasing
the efficiency of financial sectors, and promoting competition and financial inclusion, so a
balanced reaction from the authorities is needed. This new reality requires reviewing regulations
and assessing whether current supervisory approaches remain adequate, or whether a shakeup is
needed.

1
FinTech, RegTech and SupTech: What they mean for Financial Supervision dated August 2017
2
Developments in RegTech and SupTech by ESMA dated 27 November 2018
3
FinTech, RegTech and SupTech: What they mean for Financial Supervision dated August 2017
 Recent and emerging developments in RegTech and SupTech offer opportunities for authorities to
deal with the current landscape. RegTech could transform regulatory compliance and risk
management at financial institutions, while SupTech could increase supervisory effectiveness and
efficiency. Solutions that use advanced data analytics and technologies such as machine learning
to rapidly process and produce intelligence out of a large volume and variety of digital data could
lead to more timely (or realtime), dynamic and even predictive, supervision, allowing supervisors
to extract knowledge from data that would be otherwise inaccessible. SupTech could also
transform the way regulations are drafted, discussed and adopted, by creating machine-readable
regulations. A new era in supervision and regulation will not be reliant on one or two technologies,
but on the combination of many technologies. Financial authorities need to understand what’s
being offered, and should seek to take full advantage of available solutions.

RegTech and SupTech could lead to major paradigm shifts, which could be relevant to authorities
in both developed and developing economies. Arguably, developing and low-income countries,
where legacy banking IT systems and supervisory procedures may have shallower roots, could
adopt RegTech and SupTech to leapfrog to a new era more easily or faster than developed
economies with more complex and well-established financial systems and supervision (where the
shift may be more gradual). In any case, it is crucial to avoid adopting new technology without
having a strategic and overarching long-term view of where financial supervision should head in
each particular jurisdiction.

Paradigm shifts can only succeed with the right mindset and leadership at regulatory and
supervisory authorities, since they require a profound cultural transformation. Authorities need
first to recognize that they must change and be strategic in reviewing existing approaches,
organizational structures, IT systems, and technical skills. They need to understand and monitor
developments in FinTech and in particular in RegTech/SupTech in their jurisdictions (and beyond),
which could be done in part through closer engagement with industry players, including currently
unregulated FinTech firms. Building specialized knowledge through innovation offices or similar
units may also be beneficial. As the Silicon Valley mantra goes, “the expected impact of
technological change tends to be overestimated in the short run but underestimated in the long
run”.A proactive attitude towards innovation will ultimately help financial authorities navigate the
sea of change to foster market development while curbing excessive risks.”

DETAILS:
Commission’s Initiative4

Company Registrar Initiative

Ease Application System
Enhanced (EASE)
Financial Reporting System using
Extensible Business Reporting
Language (FRS-XBRL) and
The CRS is being enhanced to include amendments and similar
applications other than registration of partnerships and
corporations.
FRS-XBRL and i-CMES will facilitate compliance to reportorial
requirements by regulated entities and monitoring thereof
respectively.

4
BAIPHIL Presentation March 2019
 Compliance Monitoring System (i-
CMES)
Company Investment and
Financial Statistical System
(CiFSS)
Securities Regulation
Capital Market Participants
Registry System
External Auditors and Auditing
Firms Accreditation Registry
System (EAAFARS)
Fintech Initiatives
 Digital Asset Offering
(DAO)
 Digital Asset Exchange
(DAE)
 Crowdfunding (CF)
maintains a database of all collected and submitted company
information and annual financial statements/other reports for
analysis and generation of statistical data as required by oversight
agencies, such as BSP, NEDA, PSA and other oversight agencies
instrumental to market development planning, policy
development, legislation, and the like.
It is a web-enabled real time facility for online submission of
applications for registration, issuance of licenses, payment of
annual fees and monitoring of capital market professionals.
CMPRS is being enhanced to include the registration of capital
market institutions, integration of an online payment and online
submission of Risk-Based Capital Adequacy (RBCA) Reports.
Designed to facilitate processing of accreditation and monitoring of
compliance with rules by external auditors and auditing firms,
appraisal companies or professional service organizations, credit
rating agencies and other experts accredited by the Commission.

Activities in the Commission that can be leveraged by RegTech and SupTech – moving to a data driven
supervisory process

Overview:

 RegTech focuses on technology-based solutions to attenuate or solve regulatory and supervisory

challenges, including the challenges posed by the expansion of FinTech. It leverages digital data
and computer networks to substitute old-style processes, organizational and IT structures,
analytical tools and improve the decision-making process.5
 SupTech (or RegTech for supervisors)
RegTech does not stop at regulated institutions: SupTech is starting to tackle challenges faced by
supervisory agencies. As in RegTech, solutions are automating and streamlining administrative
and operational procedures, digitizing data and working tools, and improving data analytics. 6

5
Ibid

6
Ibid
 Activities Tech Application Risks and Challenges
Data (critical step in SupTech can help in, for instance, The non-machine-readable
transforming financial reducing time-to-report, collecting much data submitted by financial
supervision is more granular financial and institutions makes the
improvement of its transactional data without facing undue application of data analytics by
most important costs, expanding data utilized beyond regulators difficult and time
inputs) institution-reported data, consuming.
and reducing or eliminating manual
processes in the aggregation and
collection of data.
Data Collection and One possible solution to achieve this is to A critical step in transforming
processing develop machine-readable regulations, in financial supervision is
particular in the field of regulatory improving data collection. In the
reporting. Indeed, the use of IT solutions move to a data. driven
can help regulators to standardise and supervisory or compliance
codify the information they receive from process, cleanliness and
market participants, making it easier to accessibility of the underlying
manage and use the data. data is paramount. The use and
Improve business, Big Data is used broadly to describe the accuracy of such tools as AI/ML
assure regulatory storage and analysis of large and/or relies upon the strength of the
compliance and complicated data sets using a variety of underlying data. This means
analyse trends, such data elaboration techniques. Artificial that prior to the use of data,
as: fraud detection, Intelligence (AI) /Machine Learning (ML) regulators and supervisors must
reporting (regulations tools are generally used in a have in place the appropriate
require financial firms Big Data environment, allowing the procedures and systems to
to report specific implementation of new data ensure that the data they
business data to management platforms that receive is of good quality
Authorities), Risk can capture, store and analyse enormous
management volumes of structured and unstructured
(regulatory schemes data.
require firms to
manage a variety of
risks in a proper way
e.g. liquidity risk,
operational risk)
Potential application: AI/ML tools may help identify cases of a challenge for the application
Detect trade collusion to manipulate share prices or of AI/ML arises when a
syndicates in the circular trading to create a false potential misconduct case is
securities market. impression of market interest. Such tools detected. At present, external
Collusive behaviour can be tested with market data to human experts are required to
and price generate better detection results from verify that such cases warrant
manipulation the following aspect, among others:
  ML based surveillance systems further investigation. As experts
have, through mathematical are costly to employ and very
optimisation techniques, been limited in number, regulators
able to reduce false positive would benefit from any
rates. potential extension of AI/ML
 technologies to this context.
Processing of Capacity building of regulators especially To process such data, regulators
requirements as the those charged with the analysis of need to invest in the
regulatory community information. technological tools and human
are moving skills that will allow them to
increasingly to a data effectively analyse the results.
driven supervisory In turn, regulators must
process. migrate to a digital based
supervisory process; only then
can they cope with the volume
of data they will soon receive.
Operational risks, as Regulators and market participants will In addition, reliance on
both regulators and therefore need to devise and implement APIs, cloud computing and
market participants appropriate strategies to manage these other new technologies
move to a digitalized operational risks. To this end, it is facilitating increased
architecture, risks important that market participants and interconnectivity could
related to cyber regulators cooperate to promote potentially make the system
resiliency must effective management and control of more vulnerable to cyber-
become a core part of cyberrisk and to enhance cyber- threats and expose large
their supervisory and resilience. volumes of
compliance strategies sensitive data to potential
respectively. breaches. A related form of
operational risk arising from a
move to greater use of data and
risk management tools via third-
party providers is concentration
risk.