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Roger Clarke's 'A Framework for RegTech'

A Framework for RegTech

Review Draft of 27 August 2017

Roger Clarke **

© Xamax Consultancy Pty Ltd, 2017

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This document is at http://www.rogerclarke.com/EC/RTF.html


Abstract

The term 'RegTech' emerged in 2015. It was quickly harnessed as a means of adding appeal to the application of technology to compliance responsibilities, in particular those of corporations in the financial services sector. This paper instead adopts a literal interpretation of the term and articulates a broader vision of technology applied to regulation. It argues that RegTech is needed in all sectors, and by all participants in the regulatory game. The analysis is underpinned by models of regulatory layers, of regulatory players, and of regulatory play.


Contents


1. Introduction

The use of the term 'RegTech' to refer to regulatory technologies is a recent phenomenon. It appears to have been first used in this sense in a UK Government report on financial technologies in March 2015 (UKGOS 2015). The earliest occurrence found using Google News was a single, fleeting mention in an article on the UK Budget (Glick 2015). The earliest mentions found by Google Scholar are Arner et al. (2015) and Treleaven (2015). The contraction derives directly from the use by software marketers of the term 'FinTech' to refer to technologies applied to needs of the financial services sector, particularly those that are perceived to be exciting or potentially profitable. The motivation for projection of the term RegTech was the desire for "regulatory reporting and analytics infrastructure ... typically to improve efficiency and transparency [in financial regulation]" ((UKGOS 2015, pp.12, 47).

The RegTech notion was very quickly co-opted by the financial services industry association, the Institute of International Finance (IIF), without attribution, and with immediate retro-fitting of existing technologies to the new term (IIF 2015). The definition was adjusted to "the use of new technologies to solve regulatory and compliance requirements [in the financial services sector] more effectively and efficiently" (IIF 2016, p.2). Recent academic papers tend to cite IIF's 2016 definition as a starting-point.

Technology providers, eager to make their offerings attractive to corporations, have grasped the opportunity, formed new associations, and engaged in a lot of talking-up of the market. The financial services sector is naturally a primary target because it is subject to very substantial formal regulation. This is the case partly because of the enormous economic and social costs arising from the spectacular failure of softer regulatory forms, resulting in financial crises (RBA 2014). Another factor is the serial and substantial intrusions by law enforcement and national security agencies into the sector. These mandate the provision of data about transaction flows and impose onerous standards on identification and identity authentication of the sector's customers. These demands were justified originally by the spectres of organised crime, then drug lords and arms traders, and since 2001 terrorism (Zagaris 2004, Gilmore 2004)

The IIF documents and the early academic literature in the field emphasise contemporary excitement technologies, such as blockchain, Big Data, predictive analytics, biometrics, machine learning, AI and IoT (e.g. Arner et al. 2016, Baxter 2016). Such technologies may well have something to offer, despite the massive and in part seriously misleading hype associated with them (Clarke 2016a). But even without resorting to 'vogue but vague' technologies, a great many opportunities exist for RegTech initiatives. One aspect, for example, is re-discovery of the significance of continuous, automated transaction monitoring as a means of compliance assurance (Arner et al. 2016, Winn 2017).

Regulatory arrangements are important wherever natural controls fail to curb excesses. Given the scale of contemporary economies and societies, technologies need to be harnessed in support of activities of all participants in regulatory processes, including supervision by regulatory bodies, compliance by organisations subject to regulatory arrangements, and utilisation by entities that are intended to benefit from the regulation.

The purpose of this paper is to develop a framework for RegTech. This inevitably has implications for research. The primary motivation, however, is to make practical contributions to the quality of regulatory regimes, and to the application of information technologies in support of them. RegTech providers naturally 'follow the money' and focus on large corporations that have substantial obligations imposed on them by formal regulatory instruments, and hence need to perform onerous compliance activities. The financial services industry has accordingly been the initial focus, and will inevitably remain an important one. RegTech's scope is, however, far wider than that. Other industry sectors are subject to formalised regulatory requirements, and many looser and less stringent business processes can also benefit from technological support.

The work reported here adopted the design science approach to research (Brown et al. 1978, Hevner et al. 2004, Hevner 2007). This is appropriate to the creation of new and modified artefacts, including not only computing devices and software, but also "socio-technical artifacts" generally (Gregor & Hevner 2013, p.337). Design science is a comprehensive approach, comprising many phases and activities, and addressing all of them in projects of significant scale requires substantial resources. Moreover, the motivation of the work reported on here is primarily to serve the needs of practice, with implications for research a relevant consideration, but a secondary one. As Peffers et al. (2007) acknowledges, "for design in practice, the Design Science Research Methodology (DSRM) may contain unnecessary elements for some contexts" (p.72). DSRM has accordingly been applied as a guide rather than as a specification.

In terms of Gregor & Hevner's typology (2013, p.342), the work is a contribution at Level 2, nascent design theory. In terms of the DSRM process model of Peffers et al. (2007), the research commenced with problem identification and motivation, as outlined in the previous paragraphs. The following section articulates the objective of the framework, and adopts a set of criteria for the evaluation of regulatory regimes. Literatures relating to regulation are then drawn on, in order to expose the elements of the desired framework. The framework comprises three sub-models of, respectively, the layers into which different kinds of regulatory activity are organised, the players in the game, and the activities that those players engage in. The perspective adopted is that of regulation rather than compliance, that is to say that the analysis does not limit itself to the perspective of organisations subject to regulatory regimes, but takes a broad view of the field. These sub-models are then used to identify and organise many different categories of RegTech. Finally, the potential for application of the framework is demonstrated by means of a topical example.


2. The Objectives

The objective of the research reported on in this paper is the development and exposition of a framework whereby regulatory regimes can be properly understood, opportunities for the development and deployment of RegTech can be identified, and support can be provided to relevant organisations.

Each of the participants in a regulatory regime naturally has its own objectives. For example, an organisation subject to regulatory requirements may adopt a 'responsible citizen' or 'corporate social {and environmental} responsibility' (CSR/CSER) attitude, with an objective of efficiently achieving compliance with regulatory requirements; whereas a 'cowboy' in the same sector may have the objective of avoiding, subverting and ignoring regulatory requirements in order to minimise their negative impacts on the organisation's interests. Similarly, a regulatory agency may adopt the stance of a 'watchdog', interpret its legal authority as widely as possible, and seek to withstand the depradations wrought by lobbying against its activities; it may stolidly administer the scheme's enabling legislation; or it may perceive itself to have a minimalist, window-dressing role on behalf of government, and may even facilitate industry behaviour irrespective of the harm that it may cause.

The assumption adopted in this analysis is that the purpose of a regulatory regime is to exercise control over harmful behaviours. That objective is, however, subject to constraints. The most salient of these are that the measures imposed be effective in achieving their aims, and that they be efficient, i.e. that they impose no higher costs on organisations than are justified by the harm being avoided.

Many additional factors are involved, however. Criteria for the evaluation of regulatory regimes are discussed in Gunningham et al. (1998). See also Hepburn (2006) and ANAO (2007). In order to facilitate evaluation of regulatory arrangements in place in various fields, and to provide guidance to adaptations to existing schemes and the development of new ones, an articulated set of attributes of regulatory arrangements is summarised in Table 1.

Table 1: Criteria for the Evaluation of a Regulatory Regime

Adaptation of Clarke & Bennett Moses (2014, Table 2)

Process

Product

Outcomes


3. Theory of Regulation

The concept of regulation is frequently thought of as a matter of law and policy. Its foundations go far deeper, however. General systems theory grew out of observations of biology, where natural processes are subject to other natural processes whose effect is to limit, control or regulate them, giving rise to homeostatis - the tendency of natural systems to maintain the status quo (von Bertalanffy 1940, 1968). During the industrial revolution, a significant breakthrough occurred when Watts invented the steam or 'fly-ball' governor, such that a man-made process exercised automated control over another man-made process. Together, these threads gave rise to the insights of cybernetics, whereby sensors provide feedback that enables a controller to monitor a process, effectors enable the controller to influence the process, and successive levels of nested controllers enable complex systems to be managed (Wiener 1948).

This analysis is not concerned with biological phenomena or manufacturing processes, but with economic and social systems. In these contexts, the motivation for active regulatory measures arises when some class of entities behaves in a manner that has materially negative impacts on other entities. Figure 1 provides a preliminary graphical representation of key entities involved in the regulatory arena, and key relationships among them.

In this context, the term 'entity' is to be understood broadly. Regulators include tightly-controlled government agencies and relatively independent, government commissions. Regulatees include corporations, unincorporated business enterprises, government agencies, cooperatives, both incorporated and unincorporated associations, and individuals. Beneficiaries include not only all of those categories but also social values such as trust in social and economic institutions, and environmental values such as the composition of the troposphere (where weather happens, and where people, animals and plants breathe), groundwater, ecosystems and individual species of fauna and flora.

Figure 1: Key Entities Involved in Regulatory Schemes

A simple, useful but incomplete definition of regulation is "instruments used ... to influence or control the way people and businesses behave in order to achieve economic, social or environmental policy objectives" (ANAO 2007). A valuable aspect of that interpretation is its generality, in that formal legal mechanisms are not the only way to influence behaviour. A weakness of the approach, however, is that it is restricted firstly to explicit human actions ("instruments"), and secondly to those instruments whose intention is to achieve influence ("used to").

This section adopts several different views on the complete field of regulatory behaviour. It first presents a model of the layers in which regulatory instruments and processes are organised. This is followed by an exposition of a model of the players in those processes, and then by a discussion of the motivations and behaviours of those players.

3.1 Regulatory Layers

Theoretical works on regulation refer to an 'enforcement pyramid', with persuasive measures at the bottom, escalating upwards to aggressive sanctions such as licence revocation (Ayres & Braithwaite 1992). "There is a heavy presumption in favour of starting at the base of the pyramid because dialogue is a low-cost, respectful and time-efficient strategy for obtaining compliance. The responses of the regulatee to interventions drawn from the base of the pyramid are the ones that determine if, how far and when the regulator escalates up the pyramid" (Drahos & Krygier 2017, p.5).

For the present purpose, rather than individual instruments or measures, it is more useful to focus on categories of mechanisms. This paper accordingly proposes the model in Figure 2. This distinguishes layers, based on the degree of formalism and compulsion.

Figure 2: A Hierarchy of Regulatory Mechanisms

The foundational regulatory layer is a correlate of the natural control processes that occur in biological systems. It comprises natural influences, by which is meant processes that are intrinsic to the relevant socio-economic system (Clarke 1995, 2014c). Examples of natural controls include the exercise of countervailing power by those affected by an initiative, activities by competitors, reputational effects, and cost/benefit trade-offs. The postulates that an individual who "intends only his own gain" is led by "an invisible hand" to promote the public interest (Smith 1776), and that economic systems are therefore self-regulating, has subsequently been bolstered by transaction cost economics (Williamson 1979), and countered by 'the tragedy of the commons' notion (Hardin 1968). Although conservative economists commonly recognise 'market failure' as the sole justification for interventions, Stiglitz (2008) adds 'market irrationality' (e.g. circuit-breakers to stop bandwagon effects in stock markets) and 'distributive justice' (e.g. safety nets and anti-discrimination measures).

An appreciation of pre-existing natural controls is a vital precursor to any analysis of regulation, because the starting-point always has to be 'what is there about the natural order of things that is inadequate, and how will intervention improve the situation?'. For example, the first of 6 principles proposed by the Australian Productivity Commission was "Governments should not act to address 'problems' through regulation unless a case for action has been clearly established. This should include evaluating and explaining why existing measures are not sufficient to deal with the issue" (PC 2006, p.v).

That threshold test is not the only source of importance of an understanding of the natural controls that exist in the particular context. Regulatory measures can be designed to reinforce natural controls. One approach, applicable in a wide variety of contexts, is to adjust the cost/benefit/risk balance perceived by the players by subsidising costs, levying revenues and/or assigning risk.

All of the other layers in Figure 2 represent interventions into natural processes, and comprise 'instruments' and 'measures', generally designed with an intention to achieve some end. That end is desirably to curb harmful behaviours and excesses, but in some cases the purpose is to give the appearance of doing so, in order to hold off stronger or more effective interventions. Such 'counter-regulatory' phenomena are discussed in a later section.

The second-lowest layer in the hierarchy, referred to in this paper as 'infrastructural regulation', is a correlate of artefacts like the mechanical steam governor. It comprises aspects of the system that exist within the infrastructure that supports the particular socio-economic system. Those aspects may be byproducts of the artefact's design, retro-fitted onto it, or architected into it. (The first steam-engines did not embody adequate controls over excessive steam-pressure. The first steam-governor was a retro-fitted feature. In subsequent iterations, controls became intrinsic to the design of steam-engines).

Information technology provides many opportunities, and even mechanical controls are feasible, through the application of robotics. For example, dam sluice-gate settings can be automatically adjusted in response to measures of catchment-area precipitation events or increases in feeder-stream water-flows. One popular expression for infrastructural regulation in the context of IT is 'West Coast Code' (Lessig 1999).

At the other extremity of the hierarchy, formal regulation exercises the power of a parliament through statutes and delegated legislation such as Regulations. In common law countries at least, statutes are supplemented by case law that clarifies the application of the legislation. Formal regulation demands compliance with requirements that are expressed in more or less specific terms, and is complemented by sanctions and enforcement powers. Lessig underlined the distinction by referring to formal regulation as 'East Coast code'.

Regulation of the formal kind imposes considerable constraints and costs. Several intermediate forms exist, which trade off those imposts against the effectiveness of the regulation. In the lowest layer of instruments are organisational self-regulatory mechanisms. These include internal codes of conduct and 'customer charters', and self-restraint associated with expressions such as 'business ethics' and 'corporate social responsibility' (Parker 2002).

The next layer is industry sector self-regulation. In many sectors, schemes exist that express technical or process standards. There are also many codes of conduct, or of practice, or of ethics, and some industries feature agreements or Memoranda of Understanding (MoUs) that are claimed to have, and may even have, some regulatory effect. However, by their nature, and under the influence of trade practices / anti-monopoly / anti-cartel laws, these are in a substantial proportion of cases non-binding. Further, to the extent that they have any direct impact, it is only on those organisations that choose to adopt them, which seldom includes the 'cowboys' in the industry, which tend to be responsible for a disproportionate amount of the harm that the industry causes (Sethi & Emelianova 2006). Another mechanism used in some fields is accreditation ('tick-of-approval') schemes. These are best understood by describing them as meta-brands. The conditions for receiving the tick, and retaining it, are seldom materially protective of the interests of the nominal beneficiaries (Clarke 2001).

The effectiveness of the two self-regulatory layers, perceived from the viewpoint of the entities that are meant to be beneficiaries of regulatory arrangements, generally falls well short of their promise. Activities conducted under the 'governance' label are primarily motivated by the avoidance of harm to the regulatees rather than the assurance of protections for beneficiaries. Braithwaite (2017) notes that "self-regulation has a formidable history of industry abuse of [the] privilege" (p.124). Writing primarily in the context of environmental regulation, Gunningham & Sinclair (2017) write "Overall, what passes for smart regulation in policy circles is more akin to a regulatory stew from which policymakers have selected particularly juicy morsels that appeal to the political rhetoric of their masters, largely irrespective of their likely effectiveness or efficiency" (p.144). Those authors also note that 'voluntarism' is generally an effective regulatory element only when it exists in combination with 'command-and-control' components.

Other intermediate forms have emerged that have greater prospects of achieving the regulatory objective of protecting against inappropriate behaviour and excesses. In a number of areas, convincing arguments can reasonably be made by regulatees to the effect that government is poorly placed to cope with either the detailed workings of complex industry sectors or the rate of change in industries' technologies, practices and structures. Parliaments should therefore legislate no more than a framework, and enable details of the scheme to be developed within that framework.

During the last four decades, various forms have emerged that are intermediate between (often heavy-handed) formal regulation and (mostly ineffective and excusatory) self-regulation. In Grabowsky (2017), the notion of 'enforced self-regulation' is traced to Braithwaite (1982), and the use of the term 'meta-regulation', in its sense of 'government-regulated industry self-regulation', to Gupta & Lad (1983). See also Parker (2007). In parallel, the notion of 'co-regulation' emerged (Ayres & Braithwaite 1992, Clarke 1999). Broadly, these approaches involve enactment of a legislative framework, but expression of the details is established and maintained by means of a negotiation process among the relevant parties. The participants necessarily include at least the regulatory agency, the regulatees and the intended beneficiaries of the regulation, and the process must reflect needs rather than institutional and market power. In addition, meaningful sanctions, and enforcement of them, are intrinsic elements of a scheme of this nature.

Unfortunately, the promise of enforced self-regulation, meta-regulation and co-regulation has seldom been delivered. Commonly, the nominal beneficiaries are effectively excluded from the negotiations, and terms are not meaningfully enforced, and may even be unenforceable (Balleisen & Eisner 2009). Schemes of this kind that lack such fundamentals - typically in the form of 'guidelines' and 'MoUs' but sometimes masquerading under the title of 'Codes' - are referred to in this analysis as 'pseudo' meta- or co-regulatory.

There is no intention to imply that a real-world regulatory regime needs to contain elements from all of the layers discussed in this section. The purpose of Figure 2 is to identify all of the possibilities, from which the designer of a regulatory scheme needs to select one, or devise some combination, that is appropriate to the particular context, and that satisfies the criteria identified in Table 1. In practice, regulatory regimes commonly comprise elements of more than one of the layers in Figure 2: "in the majority of circumstances, the use of multiple rather than single policy instruments, and a broader range of regulatory actors, will produce better regulation [by means of] the implementation of complementary combinations of instruments and participants ..." (Gunningham & Sinclair 2017, p.133).

3.2 Regulatory Players

A preliminary model was presented in Figure 1 above, identifying three distinct categories of entity involved in regulatory schemes, referred to in this paper as regulators, regulatees and beneficiaries. This section expands that preliminary model in order to identify the much fuller set of players that may take the field across all of the regulatory layers identified in Figure 2.

In Figure 3, the central players remain unchanged. They have been joined, however, by many other entities. Any one regulatee may be subject to multiple regulators (e.g. relating to the corporations law, tax, occupational health and safety, and product-specific aspects such as food, chemicals or financial advice). Each regulator is created, empowered and resourced by a parliament, and that parliament can vary its terms of reference, and can further empower, neutralise or disestablish it. In some cases, a regulator may be accountable to the parliament, but the more common model is for the regulator to report to a designated Minister through a high-level agency. Other policy agencies may also influence the regulator's behaviour. In some sectors, a further role is evident, sitting astride the regulator / regulatee boundary. For example, stock exchanges play an intermediary role in relation to listed corporations, registrars, brokers and traders; and bank industry clearing associations perform similar functions in relation to participants in payments systems.

Regulators need to research, consult, draw on the services of consultants, negotiate, draft and promulgate. Later they need to investigate, enforce, sue and prosecute. Inevitably, their reports to the portfolio agency or the parliament involve a degree of defence against attacks from aggrieved regulatees and their associations, and, probably less powerfully, from aggrieved beneficiaries.

Figure 3: Players in Regulatory Schemes

In principle, regulatees' compliance with relevant regulatory schemes is subject to audit, although the extent to which this is implemented and effective is variable. Some regulatees contribute to the formation of technical and process Standards, and these have a degree of influence on industry activities varying from very little to very substantial. Regulatees club together in industry associations, and may seek to use an industry tick-of-approval. Key players are supported by consultants. Ombudsman schemes handle complaints from beneficiaries, and may have some influence over aspects of regulatee behaviour. In some circumstances, beneficiaries may themselves have the capacity to sue and to achieve recompense through courts, tribunals or other schemes.

RegTech providers service the needs of players in the regulatory space, and hence they generally accept regulatory schemes as they are and contrive ways in which the other players' needs can be served. However, very substantial resources are expended in achieving regulatory objectives, and RegTech providers develop a deep understanding of the mechanisms involved. A role therefore exists for them to convey to regulators the scope for adaptations to regulatory schemes in order to achieve the scheme's objectives while avoiding undue inefficiencies in the activities undertaken by all of the players involved.

3.3 Regulatory Play

The dynamics of a regulatory scheme are driven by the motivations and behaviours of the players. Beneficiaries are in most cases lightly resourced and less well-informed than the other players. Possibilities exist that can provide some degree of adjustment for power and information asymmetries, such as class actions, legal aid, representative complaints and test cases. In many contexts, however, these measures are absent or defective. Ombudsman arrangements may exist, although it is common for the bases of complaint to be limited, and uncommon for such complaints organisations to have significant powers to force change and achieve restitution, let alone power to sanction serious or repeated breaches. An alternative interpretation of such schemes is as an 'expectations management' mechanism, to reduce complainants' expectations of what the process can achieve (Gilad 2008).

Regulatees that are subject to formal regulation adopt various stances. The 'responsible citizen' approach involves a positive attitude to compliance, whereas some organisations treat it as low-priority administrative overhead, and the 'cowboy' segment of the industry flouts the rules. Consultancies develop and sell ways in which their clients can inexpensively comply with formal regulation, but also how they can mitigate, circumvent and even nullify its impacts.

As noted earlier, formal regulation imposes considerable constraints and costs. As a result, regulatees invest a great deal of time, effort and money in order to avoid, minimise and dilute formal regulation. Political influence may be used to capture the regulator, relevant government agencies, one or more Ministers, a political party and/or the parliament (Shapiro 2012). Tools commonly used at the level of industry associations and by very large corporations include lobbying of Ministers in parallel with negotiations with regulators and other government agencies, codes of conduct, meta-brands, and industry-funded complaints schemes. An examination of the dynamics underlying the failure of industry self-regulation in a particular sector is in King & Lennox (2000).

Meanwhile, individual organisations are frequently able to buy off the regulator's attention by giving 'enforceable undertakings' to stop breaching the law, or entering into 'consent orders', perhaps coupled with the belated inclusion of reviews of their regulatory compliance within their audit programs. The public wonders why breaches of the law by the politically weak are prosecuted, whereas miscreants that are large or powerful are forgiven. The credibility of such instruments is completely destroyed when regulators fail to enforce such undertakings when they have been clearly breached, as has been the case with, for example, the Federal Trade Commission (EPIC 2011).

Reference was made earlier to regulators playing roles depicted as activist watchdog, passive administrator or industry-friendly facilitator. Because regulators are generally constituted by statute, the scope for them to determine which of those roles they play depends to a considerable extent on the intention of the parliament. In practice, that is most commonly determined by the agency, or sometimes the Minister, that drives the legislation through. A regulatory initiative may be fully committed to control over negative impacts on beneficiaries. More commonly, however, under pressure of lobbying from associations representing large volumes of commercial activity, profit and jobs, the regulatory design to at least some degree compromises the definition of, or the achievement of, the regulatory objectives.

In many cases, a portfolio agency is provided with sufficient delegation from the parliament, e.g. in relation to the resourcing of the regulator, appointments to key positions within it, and the approval of codes, that it may in effect vary the parameters set by the parliament, possibly tightening them, but more likely, under lobbying pressure, easing the constraints on regulatees. Consultancies, in strategic, legal, compliance, marketing, public relations and 'government relations' areas, provide services to regulatees and their associations in relation to the most effective pressure-points among Ministers and agencies, and the techniques for achieving compromise of regulatory design or regulatory processes. The practicalities of gaming regulatory systems are matched by literatures on the political economy of regulation (e.g. Libecap 2008), and on game-theoretic analyses of interactions between a regulator and the (frequently more powerful) regulatees (e.g. Madani 2010).

Within the framework provided by these three models of the layers, the players and the plays involved in regulatory schemes, what contributions does and can technology make to the processes involved?


4. Categories of RegTech

The examples of RegTech in the financial sector that were mentioned in the first report were "real-time transaction analysis, online registration, standard data formats, standard (risk-weighted) asset indices, automated reporting, open-source compliance systems, and big data analytics" (UKGOS 2015, p.47). The considerably broader vision proposed here encompasses those aspects; but the models of layers, players and play presented in the previous sections enable the identification of far more instances of RegTech, and underline their relevance to all entities that are participants in regulatory schemes, across all industry sectors.

At the deepest layer in Figure 2 is infrastructural regulation. There are many ways in which information infrastructure can be harnessed to regulatory tasks. An important example, expressed in its most generic form, is the detection of exception conditions. For example, if a regulator has access to a real-time flow of transaction data, it can implement algorithms or rule-sets in code in order to achieve the detection of unusual occurrences very shortly after they happen. Retrospective analysis of transactions over time can discover unusual patterns. In both cases, the details can be notified to appropriate staff for detailed investigation. There are many applications of this notion. For example, a stock exchange - which is both a regulatee supervised by a government agency and a regulator of behaviour in the market that it operates - can implement automatic suspension of trading in one stock, or in all of them, when signs of spiralling bandwagon effects are detected. Similarly, a consumer appliance can auto-report malfunctions and low battery-power to its owner. It might also auto-report to the appliance-supplier potential abuse by the consumer of the supplier's restrictive license conditions.

Regulatees too can apply similar approaches, for example by pre-defining online patterns associated with misbehaviour, designing the infrastructure so that instances are detected, and security staff are alerted or countermeasures are automatically deployed. The example considered in the following section identifies a range of specific forms of embedded regulatory measures. To the extent that predictions about the 'Internet of Things' come to fruition, many more such opportunities may emerge. These may have to be imposed by regulators, but it is also possible that they may be innovations offered by regulatees.

Switching from the lowest to the highest layer, considerable benefits can be gained by RegTech providers and user organisations alike in relation to formal regulatory arrangements. Excitement abounds (yet again) concerning the possibility that AI and big data might bring major improvements. In practice, a great many opportunities remain to be exploited that apply established and reliable technologies rather than marketing buzz-phrases. Statutory regulatory schemes bring with them specific requirements, often involving the management of a considerable amount of data. This can also arise with the more formalised co-regulatory and self-regulatory schemes. These responsibilities involve detection, measurement, recording, analysis, response and reporting. Such obligations and undertakings are capable of being directly supported by information systems.

One benefit that can be achieved is effectiveness - for the regulator, control over undesirable behaviours and negative impacts, and for the regulatee, compliance with legal requirements or less formal undertakings. Other benefits can include reductions in financial costs and in less frequent deflection of executive attention away from the organisation's primary business. Further, where a system provides a regulatee with early warning, it becomes feasible to have the problem understood and under control within the timeframe in which it needs to be reported to the regulator. This obviates not only problem escalation, but also resource-wasting interactions with the regulator and unnecessary publicity. The chances of avoiding both sanctions and reputational harm are greatly improved.

Regulators already apply technology to their needs. For example, financial transactions tracking has long been a focus, in Australia by Austrac. Stock market supervisors monitor trading for patterns indicative of illegal behaviour. Health care claims are examined for evidence of fraudulent invoicing, over-servicing, and doctor-shopping in order to acquire supplies of controlled drugs. Many further possibilities exist in such areas. Registration and licensing approaches require the support of backend registry systems and a public front-end. Regulators' enforcement arms need management systems for own-motion investigations, complaints-handling, and litigation case management.

Among regulatees, in many contexts, compliance practices have been poorly resourced and inadequately supported, and hence organisations need to catch up with where they should already be. As a result, many opportunities for RegTech providers are quite straightforward to address. One important and quite generic area, for example, is data protection. That term is commonly used in relation to personal data, but it is just as applicable to data with intrinsic value (such as financial transactions, registry data that evidences ownership, and the burgeoning instances of 'wallets' containing digital cash such as Bitcoins), data with operational value (such as that used to control, or support control of, physical operations such as flows of water and gas, and movements of trains and boats and planes), and data demonstrating compliance with regulatory requirements.

Safeguards are needed against access by inappropriate organisations and individuals. Some of these measures are preventive. Others support detection and investigation, in particular of unauthorised access or hacking. Access by 'insiders' is frequently a bigger threat than hacking and social engineering. So there is also a need for safeguards against inappropriate access to and use of data by organisations that have the means to do so, i.e. that are authorised to do so for some purposes only, and that act outside their authorisations. The techniques of access control, audit trailing and automated monitoring of audit trails were well-known a quarter-century ago (Clarke 1992). Yet the implementation of such basic tools remains almost as poor as at that time, as evidenced by the continual flow of data breach reports (Lord 2017). A further important aspect of security is data integrity safeguards, through the prevention of unauthorised changes, corruption and loss of data, e.g. through periodic integrity-checking, and backup and recovery processes. In many organisations, the implementation even of 'baseline security', i.e. relatively unsophisticated measures, would greatly improve performance against regulatory requirements (Clarke 2015).

Another set of techniques of broad relevance across both formal regulation and the various kinds of self-regulation is incident management (e.g. ENISA 2010). This not only caters for reports of specific threats to the security of data, but also underpins the management of many other kinds of risks. A very similar kind of system can provide support for complaints management (e.g. ISO 2006). Depending on the context, this may be part of the organisation's customer relationship management system, or may be integrated with an industry ombudsman's system and/or with that of a regulatory agency.

Various kinds of products need, or can benefit from, a register maintained by the producer, manufacturer or importer (e.g. Hobbs 2004). This enables, for example, tracing of faulty or contaminated products, and product recalls. Considerable benefits can be gained from the integration of such features into the customer relationship management function, including warranty databases. Suppliers can achieve enhanced customer loyalty and the default-purchasing, price-insensitivity and follow-on low-cost revenue that customer loyalty gives rise to. Similarly, trusted intermediaries (such as consumer associations) can utilise forms of RegTech to establish and maintain linkages between members, on the one hand, and, on the other, service-providers, such as insurers, and regulators.

Another relevant category of RegTech is automated statistical reporting. Some outputs need to be designed to assist the entity's own management to understand the operations that are subject to regulatory measures and to detect, investigate and address problems as they arise. Other outputs can support compliance responsibilities, by promptly accounting to the relevant regulatory agency. Such systems can both improve the effectiveness and reduce the costs associated with, for example, anti-discrimination and positive discrimination measures (relating to gender, disability, age, ethnic background, sexual orientation, etc.). Although the specific requirements vary, occupational / workplace health and safety (OH&S or WHS) gives rise to obligations in relation to the design and inspection of places and processes, to staff training, to sufficiently frequent reminders of good practice, and to reporting of actions taken and outcomes achieved. Systems to support these responsibilities, combined with features of human resources systems, can ensure that educational requirements are satisfied, and occupational registration and licensing provisions are complied with. Another example of a generic regulatory responsibility that can be supported by RegTech is compliance with energy efficiency standards.

The primary emphasis in this section has been on the large-scale activities of corporations, and support for the processes managed by regulators. However, needs also exist among the intended beneficiaries of regulation. Consumers, citizens and small business alike need guidance on how to go about dealing with organisations that are failing to fulfil their obligations or otherwise behaving unreasonably. As a result of the current post-customer-service mode of business and government operations, it is increasingly common for problems to fester rather than being solved. This has increased the need for electronic tools that provide active guidance as to what requirements regulatees are subject to, which regulatory agencies exercise what powers over which regulatees, and how to initiate formal complaints processes. Many regulatory agencies provide very limited assistance in these areas, and hence scope exists for RegTech to deliver such services, provided that viable business models can be contrived.

A structured summary of regulatory measures mentioned during the analysis is provided in Annex 1. Those measures are generic, in the sense of being applicable in a wide range of contexts. Considerable opportunities also exist for RegTech in specific industry sectors, because the requirements in different areas are so diverse. Annex 2 provides a gross analysis of opportunities, utilising the Standard Industrial Classification and PC (2006, pp.viii-xiv) in order to identify relevant industry sectors and indicate factors that need to be reflected in the design of RegTech to suit each sector's needs. In Annex 3, major categories of RegTech measures are organised by regulatory layer and regulatory player.

An important element in the design science approach that was adopted in this research is evaluation of the artefact arising from the project. The following section makes a contribution to the evaluation step by applying the framework in one particular context.


5. An Application of the Framework

The previous section utilised the framework's three models to identify a range of potentially valuable forms of RegTech. A suitable means of demonstrating the value of the framework as a whole would be an examination of its applicability to a real-world regulatory regime. Suitable case studies were accordingly sought in the literature. Such case studies as were located were, however, strongly oriented towards the political economy of regulation (e.g. Lynch & Vogel 2001), regulatory law (e.g. Minor 2014), or management (e.g. Lynes & Andrachuk 2008), and lacked the detail needed for the purpose at hand. What is needed is a systemic view of the way in which a regulatory regime was designed to work and/or actually works, including sufficient information about IT applications that support the players.

Consideration was given to conducting a suitable case study. That is, however, a substantial project in its own right, and adequate presentation of it would, moreover, require an article of much the same size as the present one. An example was therefore sought of the size of a vignette rather than a full case. The author has previously published on the regulation of the public safety impacts of drones. This provided an opportunity to apply the framework presented in this paper to various forms of regulatory regime that could be created or that have been established or proposed. This is not the strongest form whereby an artefact can be tested, because it includes speculative elements, and lacks independence from the person who devised the artefact. Nonetheless, it provides a basis for gaining valuable insights into the framework's usefulness.

Background analysis is in Clarke (2014a, 2014b), a range of actual regulatory regimes are presented and discussed in Clarke & Bennett Moses (2014), and some reasonably specific proposals are outlined in Clarke (2016b). There are many kinds and sizes of both drones and drone applications, and the military, quasi-military, commercial and recreational contexts give rise to many different risks that need to be managed and conflicts of interest that need to be balanced. However, small drones for commercial and recreational use provide a sufficiently rich field of current realities and future possibilities. The scope of the discussion is accordingly limited to that category.

A degree of natural regulation of dangerous drone design, manufacture and use exists, but its effectiveness is somewhat muted. The risk of harm to the pilot is largely limited to take-off and landing manoeuvres, and at that point the device's velocity is low and the pilot's concentration is at a natural peak. During flight, on the other hand, the velocity and hence capacity for harm is higher, the pilot's concentration is variable, and such threats as arise are to others rather than to the pilot. Because recreational devices are inexpensive, the pilot, even if they are also the owner, may well be experimental and even cavalier with respect to risk to the drone, and that attitude may give rise to risk to other people's property, and to their personal safety.

The pilot is separated by some physical distance from the drone's area of operation, and from people affected by it, giving rise to a degree of social distance and hence of dissonance between the parties' valuations of the levels of nuisance and threat. This rises considerably where the device is not in Visual Line of Sight (VLOS), and where control depends on First Person View (FPV - using vision transmitted from an onboard camera to a screen or goggles) or is instrument-based. Unless conditions exist in which physical retribution is feasible (e.g. through proximity and/or recognisability), or financial retribution may arise (e.g. through a lawsuit), there may be limited contextual cues to convey other-party displeasure or risk to the pilot. Similarly, the risk of reputational harm is seldom likely to act as a constraint on pilot behaviour.

One of the tenable depictions of a drone is as a flying computer. This creates considerable possibilities in relation to infrastructural regulation. A wide range of functions have been considered, in some cases at least trialled, and even proposed as mandatory capabilities for small drones. Range limitations, sometimes referred to as 'geo-fencing', could prevent drones from being too far from the point-of-origin or from the pilot's current location. Movement outside the pilot's line of sight could be precluded, by relying on measures such as distance, ambient light and signal attenuation. Monitoring of a light-sensor could prevent night-flying. Multiple communications channels could be used in order to reduce the extent to which telemetry and control signals are interrupted. Some form of fail-soft approach to loss of contact could be mandated (although 'remain-in-place' has limited value in the case of craft with a short flight-time, and some implementations of 'auto-return-to-origin' are highly flawed). Collision-sensing and collision-avoidance are desirable, but at present the capabilities are not well-developed.

Beyond infrastructural regulation, many possible measures exist that would address public safety risks arising from drones. In the first group below, those are discussed that are most appropriately implemented as formal regulation. The subsequent paragraphs identify further measures that are tenable not only as formal regulatory measures but also as co-regulation, industry self-regulation and self-regulation. Care is needed to assign responsibilities to appropriate regulatees. Figure 4 provides a model of the players within the drone industry, sufficient to support the analysis.

Figure 4: Drone Industry Regulation for Public Safety

Reviews can be conducted of existing criminal offence provisions, and adaptations made where necessary, in relation to such matters as violent acts against persons and property, criminal negligence, and interference with computer operations and communications. This is needed in order to ensure that technological change has not undermined protections that the public reasonably expects to be in place.

Express responsibilities can be imposed on manufacturers and importers in relation to such matters as:

These may be accompanied by compulsory supplier warranties, and even strict liability. This may sound draconian, but provisions of such kinds already apply to larger aircraft, and in any case the purpose here is to identify the super-set of possible regulatory measures from which a suitable set can be crafted.

A registration scheme can be imposed on drones, i.e. a requirement on manufacturers and importers to identify each aircraft and provide details into a registry. This may, alternatively, be a licensing scheme, whereby the technical specifications of each model must be provided, and possibly be subject to certification, and even testing. This could be implemented by, for example, extension to motor vehicle or aircraft registration or licensing schemes.

Another possibility is to impose a registration scheme on individuals who acquire and/or who operate a drone and/or who pilot a drone. This may, alternatively, be a licensing scheme, whereby individuals and/or individuals on behalf of incorporated bodies are subject to training requirements and pre-testing prior to being authorised to operate or pilot any drone and/or a particular model of drone. This could be implemented by extension to driver or pilot registration or licensing schemes.

Any entity that provides a drone to a person who intends to operate it can be required to communicate specified information to them, which could include an outline of relevant laws and sanctions, operating instructions, and contact-points for insurers and model aircraft associations.

Third party insurance could be mandated for drone operators. A requirement, or alternatively a strong incentive, could be provided to operators to join an approved model aircraft association, in particular by persuading such associations to negotiate third party insurance coverage for members.

A number of further measures are arguably unsuitable for embedment in statutes, because they necessarily involve considerable levels of technical detail. A co-regulatory approach to them, on the other hand, enables considerable input from regulatees and beneficiaries, and promulgation of a Code that reflects the realities of the activities being regulated. Aspects of drone design that could be addressed in this way include the set of technical features that a drone must embody (possibly rapidly changing during the next decade or so), and the quality assurance processes that must be applied during manufacture. Other possibilities are the levels of automation that are and are not permitted, the nature of the override capabilities that are to be available to the pilot, and the categories of decision-making and actions that are precluded from being delegated to devices. Similarly, the broad notion of transparency in order to enable informed decision-making and accountability is better operationalised in a Code backed by a statute rather than within the legislation itself.

An alternative approach to ensuring that specific safeguards are built into drones is for them to be specified in industry Standards. This would facilitate the application of insights from relevant pre-existing Standards such as those for aircraft, vehicles, dangerous equipment and toys. In addition to technical matters, Standards can also specify requirements of and details concerning processes such as manufacturing and product quality assurance. However, Standards bodies are generally dominated by representatives of regulatees, and specific measures may be needed to achieve participation by representatives of the beneficiaries of the regulation.

Industry associations can play various roles in the regulation of drones. The primary motivation for them to do so, however, is as a means of holding off more interventionist measures. As a result, such approaches will seldom deliver satisfactory outcomes from the perspective of the beneficiaries. Possible activities include the provision of information to purchasers, training, and encouragement to join model aircraft associations. In addition, an industry association can operate or fund a complaints-handling organisation. In a similar manner, individual corporations in the industry can voluntarily implement design features and quality assurance processes, provide information to customers, and promote membership of model aircraft associations. Such activities would most likely be undertaken by suppliers whose marketing strategy is based on product differentiation. Those whose focus is on low-cost offerings would rationally avoid voluntarily adding to their overheads.

The analysis in this section has been empirically-based, but largely theoretical in nature. Hence a check against some actual regulatory schemes is desirable. The US Federal Aviation Administration (FAA) has rules for business uses of small drones (referred to as UAS), up to to 55lbs / 25kg (14 CFR part 107). Airworthiness certification is not required, but a 'remote pilot airman certificate' must be held by the pilot or by a person directly supervising them. Except in emergencies or where a waiver is granted, VLOS operation is mandatory, separation from people and controlled airspace is required, indoor operation and night operation are not permitted, and maximum speed of 100 mph (87 knots) and a maximum altitude (generally) of 400 ft are both mandated. For 'fly for fun' / recreational use of drones up to 25kg, a delegated arrangement is in place (Special Rule for Model Aircraft, at P.L. 112-95, Section 336). This requires operation "in accordance with a community-based set of safety guidelines and within the programming of a nationwide community-based organization". FAA sought to impose a pilot registration scheme on recreational drone users in December 2015 (FAA 2016), but it was struck down in the courts in May 2017 (Taylor v. Huerta, USCA No. 15-1495, 2015). It is unclear whether the existence or otherwise of a registration scheme would have made much difference to public safety. The recreational-use provisions in particular are at the 'light-touch' end of the spectrum outlined in the earlier part of this section.

Within the European Union, responsibility for the regulation of small drones is primarily at national level, and there is accordingly considerable diversity and lack of clarity about the requirements, for both for professional users and recreational use. During 2017, the European Aviation Safety Agency (EASA) has published a set of posters providing guidance in relation to five categories of drone, identified as C0 (<250gm), C1 (to 900gm), C2 (to 4kg), C3 and C4 (to 25kg). Whether and when drones will begin carrying the relevant marking is unclear. The regulatory measures are a gradated sub-set of factors, at a fairly fine level of granularity (EASA 2017, p.72). The regulatory regimes are encompassed by the framework, and most of the specific requirements are addressed within the theoretical discussion in the earlier part of this section.

The Australian regulator is the Civil Aviation Safety Authority (CASA). The relevant statute is expressed in general terms, and CASA issues Regulations, a form of delegated legislation. It formalised regulatory arrangements for drones in 1998-2002, and amended them in 2016. For large drones used for commercial purposes, the provisions are based on those for aircraft with on-board pilots, and include compulsory registration of aircraft and operators; training, testing and licensing of pilots; sanctions; and an enforcement regime. However, provisions relating to commercial use of drones up to 25kg in weight were significantly relaxed in September 2016, such that it is now based on registration rather than certification, and it is only necessary to "notify CASA at least five business days before their first commercial flight and agree to operate by the standard operating conditions and the guidance in advisory circular (AC) 101-10" (CASA 2016). The pattern is consistent with that of a regulator that has been captured by the regulatees. In the area of aviation safety, public opinion is subject to very large mood swings following major accidents, and knee-jerk changes to those Regulations appear likely sooner rather than later.

Non-commercial uses of drone, variously referred to in CASA documents as "for sport or recreation" and "for fun", are subject to longstanding and even more light-touch regulatory arrangements. Remarkably, these apply not only to small drones under 2kg, but all the way up to 150kg devices (CASA 2002). The guidance provided (CASA 2017) fails to even mention that CASA has regulatory responsibilities, can levy fines, and occasionally does so. In the past, this has only been when its hand has been forced by public opinion - in particular where drones have crashed onto traffic on Sydney Harbour Bridge, which means that the pilot was not only flying in breach of distance-separation rules but also within an air traffic-controlled area. During the first half of 2017, it appears that, nationwide, only a very few fines have been issued. A constructive measure has been the release of an app that enables drone users to check their proximity to air-traffic-controlled areas. However, this does little to affect the behaviour of the less socially-responsible categories of recreational drone users, who are the most likely to create threats to public safety.

A superficial review of the regulatory schemes for small drones in the USA, the EU and Australia in mid-2017 suggests that only a small proportion of the options identified in the framework are currently being applied. Moreover, it is far from clear that the regimes satisfy the criteria proposed in Table 1. The review also demonstrates that the framework presented in this paper is sufficiently comprehensive to provide a basis for detailed analysis not only of past and current regimes, but also of variants and extensions that may be needed in the future, as accidents proliferate and public opinion demands greater interventionism.


6. Discussion and Conclusions

The research reported on in this paper applied a design science approach to the objective of establishing a framework for the analysis and design of regulatory technologies. The framework comprises three views of the regulatory space, one concerned with layers of regulatory mechanisms, one with the players involved in the processes, and one with the activities, or 'plays', that those entities engage in. Within each of these models a considerable number of alternatives was identified. Appropriate regulatory design varies considerably depending on the context, and comprises a customised, and hopefully relatively small, sub-set of the rich suite of possibilities. A set of criteria was presented whereby any particular regulatory regime can be evaluated. A wide range of generic and sector-specific forms of RegTech were identified that can support various forms of regulatory activity. Application of the framework to a particular context was presented, demonstrating that the models were of analytical value, and that they enable quite specific design options to be generated.

The primary orientation of this research was to contribute to an understanding of regulatory regimes, sufficient to support the identification of appropriate forms of RegTech. The framework offers benefits to a range of organisations in a range of contexts. Software suppliers can evaluate opportunities for the creation of new applications and the adaptation and enhancement of existing products. Both regulators and regulatees can use the framework as a basis for analysing and articulating their needs, and for conducting cost/benefit/risk analyses of particular propositions. At a more abstract level, the framework provides a basis for assessing existing regulatory schemes and the technological support available for them. It enables the generation of ideas for adaptations of and enhancements to existing regulatory regimes, and designs for alternative regulatory schemes and associated RegTech.

Although the primary contributions sought and delivered are in the realm of practice, the framework also has implications for research. The framework's basis in regulatory theory requires further consideration by specialists in the economic and legal aspects of regulation, and by information systems academics. The alternative forms of RegTech and their potential applications need to be articulated in specific industry sectors and jurisdictional contexts. Existing case studies need to be sought, and new case studies need to be undertaken, in order to refine the propositions on the basis of empirical evidence.

The present work is a preliminary foray into a recently-defined field, and accordingly has many limitations. The framework was developed by applying and adapting existing regulatory theory. That body of theory is, however, very rich and dynamic. Alternative interpretations are entirely feasible, which might call into question aspects of the framework, might suggest variations to the models, or might give rise to other models entirely.

The analysis proceeded on the assumption that formal regulation continues to be relevant and feasible, at least in some contexts. That is demonstrably the case in many countries in at least a few areas, such as passenger aviation safety, anything related to 'counter-terrorism', and in many countries in relation to banking services. On the other hand, large corporations have been increasing their scale and trans-national nature for decades. The scope for jurisdictional arbitrage has increased, as countries engage in 'regulatory competition', eagerly ratcheting down the control exercised over corporate behaviour in order to attract more economic activity (e.g. Backer 2008). A further threat to formal regulation has emerged in the form of the so-called 'sharing economy' associated with the Airbnb / Uber business model. This has been accompanied by pleas for regulatory schemes to be simply abandoned in favour of a new 'innovation imperative' (e.g. Koopman et al. 2015). Meanwhile, in many countries, a significant proportion of elected representatives are subject to bribery or other means of achieving favourable treatment for corporations (Amundsen 1999), or are dependent on corporate support for their campaign finance (Lessig 2011). In such circumstances, the enactment of formal regulation is very difficult and instead pressure is exerted for de-regulation. As a result of these factors, the extent to which individual nation-states can effectively control the behaviour of large corporations is in increasing doubt. A further factor in many countries is the use of excessive regulation as a means of extracting bribes from organisations that are trying to conduct even mainstream economic and social activities. More care may be needed in factoring these aspects into a framework for RegTech.

The term RegTech is capable of interpretation as referring to technologies generally, whereas the analysis conducted here is strongly oriented towards information technology. Consideration needs to be given as to whether a broader scope is needed, encompassing engineering (e.g. construction, energy) and the sciences generally (e.g. pharmaceuticals, industrial chemicals, clinical psychology), and whether the models work in such contexts or need refinement, or whether they necessitate an entirely different framework.

Beyond the limited, essentially confirmatory, study of the drone industry presented in this paper, the models need to be tested. That requires by conduct of deep case studies of a sufficiently rich variety of regulatory regimes. The propositions relating to generic and sector-specific examples of RegTech also need to be subjected to examination.

The RegTech notion was first applied in the financial services sector, and specifically in order to assist regulatees to achieve compliance with formal regulation. The analysis presented here has shown that such a narrow conception is inappropriate. RegTech has the capacity to benefit regulators, regulatees and beneficiaries. It can be applied to both generic business functions and industry-specific needs. It is not limited to formal regulation, but can be applied to all forms of co- and self-regulation as well.


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Annex 1: Generic Examples of Measures in Each Regulatory Layer

Formal Regulation

Meta- and Co-Regulation

Pseudo Meta- and Co-Regulation

Industry Self-Regulation

Organisational Self-Regulation

Infrastructural Regulation

Natural Regulation


Annex 2: Industry Sectors with Particular Needs

Major Group ('Division')
Sector
('Group' and 'Class')
Regulatory Considerations
Agriculture, forestry and fishingGrowing of Controlled Crops (e.g. Poppies for Opium, Tobacco, Marijuana)Public health
 Hunting, trapping and related service activities Protected species, animal welfare
 FishingSustainability, species protection
 Aquaculture Water pollution, species protection
Mining and quarrying Mining of coal and lignite Air pollution, groundwater pollution
 Extraction of crude petroleum and natural gas Air pollution, groundwater pollution, public safety
 Support activities for petroleum and natural gas extractionAir pollution, groundwater pollution, public safety
 Mining and quarrying of controlled materials (e.g. asbestos, mercury, titanium)Public safety, strategic resources
Manufacturing
but also Importation
Processing and preserving of meat Public health, tracking of individual items
 Dairy products Public health
 Alcoholic beverages Public health, taxation
 Tobacco productsPublic health, taxation
 Tanning and dressing of leatherGroundwater pollution, public health
 Paper and paper productsGroundwater pollution, public health
 Reproduction of recorded mediaCopyright breach
 Refined petroleum productsAir pollution, groundwater pollution, public safety
  Fissile materialAir, ground and groundwater pollution, public safety, control of explosive materials, tracking of individual items, prevention of crime
 Fertilizers and nitrogen compoundsPublic safety, control of explosive materials, tracking of individual items, prevention of crime
 Pesticides and other agrochemical productsPublic safety, control of explosive materials
 Dangerous chemicals (e.g. ammonia, propellants, explosives)Public safety, control of explosive materials, tracking of individual items, prevention of crime
 PharmaceuticalsPublic safety
 Weapons and ammunition Public safety, control of explosive materials, tracking of individual items, prevention of crime
 Irradiation equipmentPublic health and safety
 Medical and dental instruments and suppliesPublic health and safety
Electricity, gas, steam and air conditioning supply Electric power generation, transmission and distributionPublic health and safety
 Manufacture of gas; distribution of gaseous fuels through mainsPublic health and safety
Water supply; sewerage, waste management and remediation activities Collection of hazardous wasteGroundwater pollution, public health and safety
 Treatment and disposal of hazardous wasteAir, water, ground and groundwater pollution, public health and safety
ConstructionDevelopment applicationAir, water, ground and groundwater pollution, species protection, public health and safety
 Demolition and site preparationAir, water, ground and groundwater pollution, public health and safety
 Electrical installationPublic health and safety
Wholesale and retail trade ...Motor vehiclesConsumer protection, public safety, tracking of individual items, prevention of crime
 Food, alcoholic beverages and tobaccoPublic health, taxation
 Solid, liquid and gaseous fuels and related productsPublic safety
 Pharmaceutical and medical goodsPublic health and safety, tracking of individual items, prevention of crime
 Weapons and ammunition Public safety, tracking of individual items, prevention of crime
 Devices for interception, jamming, encryption and decryptionProtection of telecommunications
 Dangerous goods (e.g. explosives)Public safety, tracking of individual items, prevention of crime
Transportation and storage Freight transport by roadPublic safety
 Passenger air transportPublic safety
 Freight air transportPublic safety
Accommodation and food service activities AccommodationPublic health and safety
 Restaurants and mobile food service activitiesPublic health and safety
 Beverage serving activitiesPublic health and safety
Information and communication Radio broadcasting Protection of telecommunications
 Television programming and broadcasting activitiesProtection of telecommunications
 Wireless telecommunications activities Protection of telecommunications
 Satellite telecommunications activities Protection of telecommunications
Financial and insurance activities Financial Services (e.g. banks, credit unions)Protection of critical infrastructure, protection against financial and taxation fraud, investigation of money laundering
 Financial ExchangesInvestor protection, protection against financial and taxation fraud
 Trusts, funds and similar financial entitiesProtection against financial and taxation fraud
 Credit grantingConsumer protection
 Pawn shopsCriminal investigation, location of individual items
 Life insuranceConsumer protection
 Health insuranceConsumer protection, public health
 Non-Life insuranceConsumer protection
 Pension fundingConsumer protection, protection against financial and taxation fraud
 Activities of insurance agents and brokersConsumer protection
 Activities of financial plannersConsumer protection, protection against financial and taxation fraud
 Fund management activitiesConsumer protection, protection against financial and taxation fraud
Real estate activities  Consumer protection
Professional, scientific and technical activities Legal activitiesConsumer protection, protection against financial and taxation fraud
 Accounting, bookkeeping and auditing activities; tax consultancyConsumer protection, protection against financial and taxation fraud
 Company directorship activitiesInvestor protection, protection against financial and taxation fraud
 Architectural and engineering activities and related technical consultancyPublic safety
 Veterinary activitiesAnimal welfare
Administrative and support service activities Travel agency activitiesConsumer protection, protection against financial and taxation fraud
 Tour operator activitiesConsumer protection, protection against financial and taxation fraud
 Private security activitiesPublic safety
 Investigation activitiesConsumer protection
 Activities of collection agencies incl. debt collectors, and credit bureausConsumer protection
Public administration and defence; compulsory social security   
Education Child day-care activitiesProtection of children
 Pre-primary and primary educationProtection of children
Human health and social work activities Hospital activitiesPublic health and safety
 Medical and dental practice activitiesPublic health and safety
 Pharmaceutical suppliesPublic health and safety, tracking of individual items, prevention of crime
 Residential care activitiesPublic health and safety
 Social work activitiesPublic health and safety
 Migration consultantsConsumer protection, protection against fraud
Arts, entertainment and recreation Gambling and betting activitiesPublic health, consumer protection, protection against financial and taxation fraud
 Activities of sports clubsProtection of children
 Activities of amusement parks and theme parksPublic safety
Other service activities Funeral and related activitiesConsumer protection
Activities of households as employers; undifferentiated goods; own use production   
Activities of extraterritorial organizations and bodies  


Annex 3: RegTech Functions by Layer and Player

 
Regulator
Regulatee
Beneficiary

Formal Regulation

Meta- and Co-Regulation

Industry Self-Regulation

Organisational Self-Regulation

Management systems for own-motion investigations

Management systems for complaints investigations

Registration / Licensing Systems

Case Management Support Systems

Subsidy and Levy Management Systems

Exception detection mechanisms

Systems for measurement, recording, analysis, response and reporting

Product registration systems

Incident management systems

Complaints management systems

Data management systems (anti-discrimination and positive discrimination

measures; OH&S/WHS; energy efficiency measures)

Automated statistical reporting systems

Compliance management systems

Compliance audit support systems

Policy database systems

Case evaluation wizards

Support systems for preparation and submission of complaints

Case management systems

Infrastructural Regulation
As byproduct, architected, or retro-fitted
Direct access to organisational transaction systems

Auto-reporting from organisational systems

Access control, audit trailing, automated monitoring of audit trails

Data integrity safeguards

Detection of exception conditions and unusual occurrences in real-time

Detection of exception condictions and unusual occurrences through retrospective analysis

Auto-adjustments of parameters in response to input/process/output measures

Auto-deployment of countermeasures

Auto-suspension of activities

 
Natural Regulation
Exercise of countervailing power by those affected by an initiative

Activities by competitors

Reputational effects

Cost/benefit trade-offs


Acknowledgements

A preliminary version of the layer model in this paper was presented as part of an address on 'Biometrics as RegTech?' at the 10th Workshop on the Social Implications of National Security (SINS17) in Sydney, on 9 August 2017. Valuable comments were received from Ross Buckley, Peter Drahos, Graham Greenleaf, Neil Gunningham and Michael Walters, but responsibility for all aspects of the paper rests with the author.


Author Affiliations

Roger Clarke is Principal of Xamax Consultancy Pty Ltd, Canberra. He is also a Visiting Professor in Cyberspace Law & Policy at the University of N.S.W., and a Visiting Professor in the Research School of Computer Science at the Australian National University.



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