Many private market players struggle to stay abreast of a changing regulatory framework.

RegTech can provide solutions, helping raise standards and facilitate transactions. However, tech adoption is still slow for financial institutions often confused at the RegTech offering.

HUBX COO Pablo Vergara helps shed some light on the RegTech challenge…

How did you find yourself COO of a FinTech business?

Throughout my career, I worked as an executive in Group Treasury divisions of large international banks. My focus was balance sheet, liquidity and funding risk, scenario planning and risk management. After 25 years, I took a break to travel the world with my family.

During that period, I realised I really wanted to be involved in the transformative digitisation of both society and the economy. Financial industry trends have always fascinated me. More specifically, the obvious shift from public wholesale markets, into an entrepreneur-driven private capital market.

HUBX combined those two very exciting trends and topics. That is why I joined in December 2015 when invited by the two founders, Stephen and Axel.

Pablo Vergara

What challenges must the UK regulatory landscape tackle?

Though we are deep into the digitisation of the economy and the financial system, UK regulation remains backward looking.

“We are in a catch-22 situation where regulators are attempting to fix current problems due to past issues. Crucially though, we should be thinking about market trends .”

Pablo Vergara, COO, HUBX

In the last 10 years, the UK regulatory landscape focused on fixing the consequences of the financial crisis. For example, policies have included many attempts to sort out the capital and liquidity adequacy for banks. Privacy laws were also introduced for protecting individual identity and personal data.

Why not put more focus on keeping regulatory frameworks relevant? Unfortunately, we are in a catch-22 situation where regulators are attempting to fix current problems due to past issues. Crucially though, we should be thinking about market trends and the needed infrastructure for tomorrow. How does regulation meet future public needs?

The RegTech boom brings a range of solutions which could fundamentally change existing processes. For the better.

How do you foresee technology changing regulatory practices?

We can already see the impact of technology in the sectors of crowdfunding platforms and API-based ID verification combined with Customer Due Diligence. Entrepreneurs building their own eco-systems drove the growth of both these fields. However technology is yet to impact how financial institutions tackle the compliance function with regulatory frameworks overall.

RegTech is here to stay. However, for now, market participants and the regulator will keep driving compliance as a risk-based process.

In the short term, however, technology is already helping. Standardising and increasing the volume of data support risk-based decisions at scale. But we are still a long way from technology replacing such decision-making processes entirely. Not until proper data science and AI assets are dedicated to the problem.

Which was the initial pain point you wanted to solve at HUBX?

With HUBX focused on the private capital markets, we are only dealing with professionals. In this context, the regulatory burden is lighter as players are acutely aware of potential risks compared to the retail public.

“We managed to identify early on that this Financial Promotion document could be standardised and digitised.”

Pablo Vergara

As we were creating a digital process from origination to execution, we focused on our ‘Financial Promotion’ tool. The UK is quite strict when it comes to promoting an investment opportunity in a regulatory compliant manner. Early on, we realised that this Financial Promotion document could be standardised and digitised.

Specifically, it means converting investment opportunities or deal projects into a compliant, distributable, electronic document. This document is then circulated, edited and signed off by the originator and compliance function for immediate online availability.

“We think a homogeneous and standardised settlement process in the private markets could be incredibly valuable to our clients.”

Pablo Vergara

Another RegTech challenge was the categorisation of investors at scale. With MiFID II, advisors must organize their clients into auditable categories. Through a single digital process, tests and criteria can be streamlined into tools for self-assessments and data recording. Ultimately, these steps allow advisors to manage and grow an organised and structured investor base, with relevant data.

How difficult was it to implement your vision for RegTech in the private markets?

Interestingly, when it came to implementing our Financial Promotion and Categorisation solutions, challenges were not related to technology! In fact, our main challenge was convincing our clients that our solution was in effect compliant, and ticked all legal and regulatory boxes.

Resistance to change is the biggest obstacle in the field of regulatory risk automation, as it is with technology adoption.

Do you think standardisation is possible in the Private Capital Markets?

Within a deal flow cycle, we can help improve many more specific processes. For example, we are particularly interested in the settlement of private securities: issuance of share certificates or private debt instruments, and managing the entire flow of investor money. In our view, a homogeneous and standardised settlement process in the private markets would be incredibly valuable for all parties involved.

Hopefully, regulators can support the work we, and other tech firms do in accelerating standardisation in this field and others.

So yes, technology can go a long way to improving standards and scaling the private capital markets in a publicly beneficial and compliant way

What is the next big thing for regulators?

A broad question!

The obvious answer in my mind is tokenization and the issuance of digital assets. Specifically, the ability for any institution to create shares or debt instruments on a fully digitalized basis. While it would bring huge value to investors and issuers, in primary and secondary markets, it is still pretty much a blank page, despite recent FCA and start-ups’ first steps. Regulators are scratching their heads, hoping to encourage innovation. All the while, they are protecting investors and the markets from a systemic risk perspective, so dealing with contradicting objectives. But this natural tension will hopefully prove to be the fertile basis for a balanced and market friendly approach in the end.

“Imagine a mechanism which would facilitate secondary transactions between original and new investors in private companies.”

Pablo Vergara

Still, it is a massive field of development. At HUBX, we are very excited about it. We also hope that shares or debt instruments in private companies can become more liquid.

Since inception, EIS investment schemes saw £20bn investments. Most this capital is still invested in the original companies. Imagine facilitating secondary transactions between original and new investors in private companies! This is the kind of Big Bang that we believe is around the corner.

After all, the endgame in the private markets is to leverage technology to help bridge the funding gap. RegTech has a major facilitator role to play.