Almost three-quarters of financial authorities globally are engaged in SupTech (supervisory technology) initiatives but these efforts largely remain in the ‘experimentation’ stage, according to a newly published data-laden analysis.
The ‘State of Suptech Report 2022’, compiled by the Cambridge Centre for Alternative Finance (CCAF)’s SupTech Lab based on a survey of 134 financial authorities from 108 jurisdictions, highlights growing SupTech take-up and also obstacles to its use.
The overall field of SupTech – one of six priorities in the Bank for International Settlements Innovation Hub’s 2022 work programme – is described by the report’s authors as ‘relatively nascent but rapidly and necessarily accelerating to address the needs of supervisors in the face of novel and newly-magnified risks introduced by a financial sector that is digitalising and generating supervisory data at an exponential rate.’
Seventy-one per cent of authorities indicated in their responses that they have engaged in SupTech efforts, with the main focus on improving data collection and ‘basic’ analysis, the report finds.
Fifty-nine per cent of authorities report using SupTech applications for consumer protection, while 58 per cent report using SupTech applications for prudential supervision – making these two areas the two most popular reasons for using SupTech.
Securities supervisors ahead of central banks
Financial authorities responding to the survey included central banks (81 responses), securities and capital market authorities, financial conduct authorities and insurance regulators.
Securities industry supervisors are typically most progressed in terms of SupTech adoption, with central banks ‘lagging behind’, the 112-page report states.
‘The reason might be that the former rely more on off-site supervision than central banks do, and up-to-date analytics software is needed to analyse massive volumes of transaction data,’ the report notes. It gives the example of the Australian Securities and Investments Commission (ASIC) using SupTech ‘to transform datasets into usable patterns for market surveillance and suspicious trading detection’.
‘Securities supervisors’ core risks are of conduct nature rather than prudential,’ the report adds. ‘Often, these risks are evidenced in the processing of large unstructured information documents such as compliance manuals and internal policies, where new technologies allow supervisors to extrapolate content from different firms to obtain an industry-level view that was previously just sensed by them.’
The three most adopted supervisory technologies, according to the report’s findings, are descriptive and diagnostic analytics; web portals and document management; and application programming interfaces (APIs).
*** SIGN UP NOW TO RECEIVE OUR FREE EDITORIAL NEWSLETTER ***
SupTech adoption’s biggest obstacles
Challenges to SupTech take-up remain ‘significant’, as are the differences between SupTech’s use in advanced economies compared to emerging markets and developing economies (EMDEs), the report also points out.
Lack of budget, data quality and technical skills are the three most significant barriers, according to survey responses.
In terms of geographic differences, financial authorities in advanced economies are – almost inevitably – typically more progressed in their SupTech use. They more often have sufficient digital infrastructure, more often assign dedicated SupTech roles and departments, and report seeing more substantial internal outcomes than those in EMDEs. EMDE agencies, meanwhile, tend to run SupTech initiatives within pre-existing supervision departments.
Top challenges to SupTech engagement differ between authority types. For central banks, challenges are primarily related to internal culture and strategic buy-in. For capital markets, securities and investment instruments supervisors, challenges tend to be related to upgrading existing systems and processes. For other supervisors, uniquely prominent challenges are with IT systems.
In terms of tools that financial authorities would like more of, prescriptive analytics ranks top (desired by 86 per cent of respondents). Eighty-one per cent want task automation to record and replay tasks on a supervisor’s behalf to save time. Seventy-nine per cent want advanced image processing (such as computer vision in general, or more specific components such as optical character recognition).
SupTech’s ‘new opportunities’
The report asserts that SupTech is enabling new supervisory use cases ‘that would not otherwise be possible’.
‘While SupTech solutions use chatbots and APIs [application programming interfaces] to optimise existing processes and augment legacy tools, others are opening completely new opportunities for supervisors,’ its authors note. ‘The ability to ingest massive online datasets like social media streams to conduct sentiment analysis, to parse [sift] online reviews to assess risks or identify fraudulent fintech apps, and to conduct real-time, on-chain [blockchain] analyses for digital assets supervision are just a few of many examples’.
More broadly, data is a strategic priority for an increasing number of financial authorities, with most respondents either having a data strategy in place (56 per cent) or in development (33 per cent). While data is a critical factor for central banks, only 43 per cent have a data strategy in place, and a further 39 per cent are currently developing their data strategy.
Centralised data office models to accelerate SupTech development and implementation are nonetheless ‘emerging’, according to the report. Thirty-five per cent of the surveyed financial authorities have a dedicated centralised office reporting to a chief data officer who is either solely responsible for the SupTech initiatives or works with other functions to develop and deploy SupTech.
Six central bank case studies are also contained in the report. They are in the fields of: data collection (Bank of England); data processing (Bangko Sentral ng Pilipinas/Central Bank of the Philippines); data storage (National Bank of Rwanda); data analytics (De Nederlandsche Bank/Central Bank of the Netherlands); data products (the Reserve Bank of India’s recently launched ‘Advanced Supervisory Monitoring System’, DAKSH); and ‘full stack’ (combination of multiple technology applications) (BIS’s ‘Project Ellipse’).
SupTech’s rise during Covid-19
The report is published just over 12 months after the Financial Stability Institute (FSI), a BIS-housed body, published a paper (‘Suptech tools for prudential supervision and their use during the pandemic’) setting out how travel restrictions and social distancing protocols during the height of the Covid-19 pandemic ‘severely curtailed’ on-site inspections and prompted financial authorities to use more SupTech tools for day-to-day oversight of companies.
The FSI paper had a similar overarching conclusion to the Cambridge research, finding that although financial authorities’ use of SupTech tools proved ‘indispensable’ during the pandemic, ‘formidable’ implementation challenges meant that barriers remained to broader adoption and acceptance. The 20 authorities that took part in the FSI research reported using, developing or experimenting with 71 different prudential supervisory tools (a surge from just 12 tools in 2019). But the paper noted that ‘limited’ data science skills within supervisory authorities, data quality issues that underpin SupTech models and ‘settling on an appropriate calibration of SupTech parameters’ were all hampering broader adoption of SupTech tools.
The Cambridge SupTech Lab launched last year – backed by funding of $3.1m (about £2.55m) for 2022-2023 from US-headquartered philanthropic organisation the Bill & Melinda Gates Foundation (BMGF) – with an initial focus on boosting the capabilities of financial regulators in low- and middle-income countries. It ultimately aims to accelerate innovation in all financial supervisory bodies worldwide.
The CCAF organised a webinar on 20 December 2022 focused on its report, which was supported by the BMGF and UK Foreign, Commonwealth & Development Office. A discussion featured Melissa Koide, chief executive of Washington DC-based non-profit FinRegLab; University of Hong Kong law professor Douglas Arner; and Pia Roman Tayag, director of the office of the UN Secretary-General’s Special Advocate for Inclusive Finance for Development. Cambridge SupTech Lab co-heads Simone di Castri and Matt Grasser also spoke at the webinar, which included discussion of procurement challenges (and mention of the European Central Bank (ECB)’s €200m-plus SupTech procurement, which concluded eight months ago).
*** FOLLOW US ON LINKEDIN ***
FURTHER READING
‘ECB looks to “Project Olympus” to transform banking supervision using SupTech’ – our news story (20 September 2022) on ECB Supervisory Board member Elizabeth McCaul describing the authority’s aim of “transforming banking supervision in the next five years” in a speech titled ‘The Impact of SupTech on European Banking Supervision’
‘ECB completes €200m-plus procurement as it looks to “pioneer” SupTech innovation’ – our news story (29 April 2022) on the Frankfurt-based authority appointing five contractors for ‘lot one’ of its first ‘SupTech’-specific procurement: d-fine; IBM (Deutschland); NTT DATA Deutschland/NTT DATA Belgique; Oliver Wyman and Senacor FCS; and awarding ‘lot two’ to a consortium comprising Intrasoft International, business school INSEAD and GFT Italia
‘Cambridge SupTech Lab launches with focus on low- and middle-income nations’ – our news story (6 April 2022) the SupTech Lab’s launch
‘BIS Open Tech debuts with “potentially game-changing” SupTech tool’ – our news story (1 April 2022) on an ‘open’ platform for sharing nascent financial and statistical software as public goods being launched by the BIS: one of the first two projects published there is prototype SupTech platform ‘Project Ellipse’ (as mentioned in our story, above)
‘SupTech use rockets but adoption barriers remain: survey’ – our news story (8 December 2021) on the Financial Stability Institute paper (as mentioned in our story, above)
