RegTech & its Challenges

The regulatory environment for the fintech startups needs a new approach

The Global financial crisis of 2008 was not only the turning point in the evolution of Fintech as we have seen in the last decade but a game-changer for the resulting financial regulations as well. Financial markets have always been regulated on the basis of the Efficient market hypothesis — the idea behind this is that there is sufficient information available to market participants to determine the price of the asset at any given point. This hypothesis, however, is based on a number of assumptions about markets.

1. Perfect information available
2. No transaction costs involved
3. Perfect Competition
4. Rational market participants

All these ideas lead to the efficient functioning of markets which in turn supports the overall economy. But in actuality none of these assumptions hold true — we know that market information is asymmetric (Not perfect), there are always transaction costs involved in acquiring information or executing transactions & that competition is almost never perfect.

Much of the regulation prior to the global financial crisis was focused on improving on enhancing competition, reducing costs & improving information quality…