The FCA have now officially published the findings from their consultation with the industry on the development of RegTech. This is a much awaited document for those seeking to understand the direction of the regulator with regards innovation, particularly in the context of all the recent uncertainty in the wider regulatory landscape.
It is evident from the findings that the FCA have been a clear and forward thinking regulator, yet again. At its most basic form, there is a summary of industry feedback on the problems with adopting RegTech, the perceived benefits of new technologies, the FCA’s role and approach in supporting RegTech development and their next steps. Below we have outlined the FCA’s findings alongside our own reflections on these.
Uses for RegTech
Participants saw real potential in technologies for driving a more efficient, flexible and collaborative approach to meeting regulatory obligations. Examples included cloud computing for reducing costs, shared utilities for pooling information such as KYC data, and big data analytics for enabling new insights into unstructured and structured pools of data.
Having hosted one of the RegTech roundtables in March, we saw there is a lot of hope placed on the ability of technology to, in the FCA’s words, “close the gap between intention and interpretation” of regulations. The FCA expressed this best as a concerted effort to digitise regulatory text into a programming language, coming to a common understanding of the structure of regulatory data, bringing in APIs to increase connectivity across systems and establishing a Robo-handbook as a more interactive method for understanding the impact of regulations on a specific business model. With the encouraging words of Christopher Woolard on this subject still ringing fresh, we can expect to see more in this area in the future.
Of course, there was a dedicated referral to the use of new technologies, such as Blockchain, Biometrics and AI, as part of a multitude of ways we could see the structure of compliance change over the years to come. Yet there is recognition that these will be long term working efforts that don’t come free of risk, as the recent ESMA discussion paper on Distributed Ledger Technologies suggests.
We consider the list that the FCA has compiled comprehensive and well-categorised. Indeed, the focus on understanding and managing regulation better using RegTech was a central topic of discussion at our RegTech conference on 5 July. Here, 150 attendees from top tier banks, buy-side firms, vendors, lawyers and academics across the industry agreed that publishing regulations in code and sharing the data was the way forward, and that this new era of post-crisis regulation cannot be met without a better infrastructure.
Barriers to RegTech adoption
The main barriers to RegTech adoption that emerged from the feedback statement were the legal restrictions and lack of standardisation on both data and regulation in general, and the issues involved with moving away from legacy systems. Some participants mentioned how many of the technologies referred to are still very much in development state, and it was considered a large risk (in a time of low risk appetite) to invest in such a fundamental change to a firm’s infrastructure.
Other issues included the timing of regulations, whereby uncoordinated deadlines force regulated firms into a reactive state. Even with MiFID II delayed, the sheer plethora of regulations going live before the new 2018 implementation date (GDPR, PRIIPs, Volcker Rule, etc.) hinders any proactive effort to prepare for the long term.
Again, these were all raised as key issues throughout our RegTech conference. Without a common understanding of what is being asked for, firms are consigned to guesswork. Often the results of this are poor or non-compliance, further fines and no regulatory objectives being met.
It is fair to say that Brexit has increased the severity of this risk. If complexity and uncertainty are blockers to innovation, then the result of the EU referendum must top the list right now.
Yet every crisis has an opportunity, and there is a chance that the situation the UK has found itself in will spur a greater call for the change it so desperately needs. In a blogpost for Comply Advantage, it was noted that potential disparities between EU and UK regulation will increase the need for multijurisdictional businesses to have flexible compliance systems in place. Semantic technologies can accelerate this process and help the industry stay on top of multiple regulatory regimes at a time, as we have outlined in our work on Brexit.
The FCA’s role and approach
The development of RegTech can only advance with distinct leadership, which is one reason why the FCA’s clarity on their continued engagement with RegTech is an incredibly precious resource in an increasingly murky landscape.
In the feedback statement, the FCA claim that the ways they will be going forward in their approach will be through standards and engagement, collaboration and setting an example themselves.
Indeed, there is much work the FCA is pressing on standards. They have revealed that their next TechSprint will bring standards providers together to start working on a greater shared meaning of regulation, while Christopher Woolard’s recent speech – on the need to lighten the regulatory reporting burden through RegTech and data sharing – at London FinTech week was a strong signal that we are heading towards data harmonisation.
In terms of collaboration, the FCA has been very open with other regulators, such as the Australian Securities and Investment Commission (ASIC), the Monetary Authority of Singapore (MAS) and many of its counterparts on the continent, in sharing information and signing agreements to work together. They are patently switched on in knowing how to advance a cause which will need to be global if it is to succeed.
There is no better example of a UK regulator setting an example than Mark Carney’s recent launch of a FinTech accelerator within the Bank of England. And with serious discussion about the FCA making their handbook more accessible through RegTech, we can expect to see much more automation in the regulators role in the future.
The FCA have expressed that they will be using the feedback from the call for input to build a credible role for the regulator in the RegTech community – one that is progressive, useful and valued. While the last TechSprint focused on financial inclusion, the next will look into working with bodies to define new standards.
Having seen an incredible amount of excitement in the RegTech arena from our 5 July conference, we can see that the industry is now on the same page. Standards are needed, but so are a much more automated rulebook, a concerted effort with verifying technologies (despite the difficulties) and increased engagement with the community. With all this in mind, the next few years could see a huge transformation in the way financial regulation is made and done.