Regulatory Tech Costs Can Have Benefits, Too 

Though often considered a drain on the economy, regtech — technology that helps companies comply with government regulations — can pay unexpected dividends.  

What They Studied 

With spending on regtech expected to hit $208 billion by 2028, Zachary Kowaleski, assistant professor of accounting, and his three co-authors looked at the cost of compliance on broker-dealers, who trade securities for themselves as well as for clients. They examined data reported to the Securities and Exchange Commission by 3,317 broker-dealers before and after the imposition of a 2014 rule prompted by a rash of Ponzi schemes. 

What They Found 

The investments showed that company data could be used to improve customer relations and monitor employee behavior. Although they spent 24% more on information technology, companies saw 4% declines in customer complaints, employee misconduct complaints, and incidents causing at least $5,000 in damage. But regtech didn’t help everyone. Its benefits accrued mostly to large broker-dealers who compete on scale. Its costs weighed more heavily on small companies. 

Why It Matters 

Although the paper does not look at the SEC rule’s central purpose of protecting customers, Kowaleski notes that it’s still important. SEC rules on capitalization and the segregation of customer assets could have saved investors by restraining fraud at FTX Trading, the now-bankrupt cryptocurrency exchange. Regtech may be costly to companies, “but they’re not just waste,” Kowaleski says. “RegTech: Technology-Driven Compliance and Its Effects on Profitability, Operations, and Market Structure” was published in the Journal of Financial Economics. 

— Kiah Collier