In this tech-led series, we're covering the key trends and forces of change that will dominate financial services in 2020. We can’t wait to see how new tech will be embraced and in this article, we explore how the regulator could utilise technology in the near future...
Next year could be a watershed moment for how the authorities uphold regulatory standards and enhance customer protection through new technology. Experts at PwC have argued we could see a more extensive adoption of tech from leading financial services regulators, but what would this look like?
The use (or rather, misuse) of our data has become a huge issue in modern regulation. PwC expects regulators to begin turning to technology in order to enhance their monitoring activities and could eventually seek direct access to tools used by institutions for KYC/AML, trade surveillance, and more. As we covered in our recent eGuide (The Compliant Marketer’s Ultimate Guide to Personalisation), high profile scandals linked to how firms use data has brought the issue front and centre.
Tellingly, Facebook co-founder Chris Hughes recently said: “The time’s come due for regulation, for structural solutions and for a general cultural rethinking of how to ensure platforms are working for us rather than us working for the platforms.”
To some extent, the horse has already bolted the stable when it comes to the regulation of data. Big tech firms have revolutionised the use of technology and its use has become deeply engrained to an unprecedented degree in our day-to-day lives. However, that is not to say regulators can’t take a tool from the market’s book and start to innovate in how they use technology themselves.
It makes sense for any regulator to embrace technology in its day-to-day supervision activities, simply because it's so time-consuming. With a plethora of post-crisis regulation to enforce, it is easy to see how regulators’ resources are stretched.
Regulators like the FCA take their duty extremely seriously, and the risk of leaving customers unprotected – or angering innocent regulated firms – is one they are keen to avoid. By automating and improving efficiency in some of the more formulaic regulatory areas, the FCA would be able to free up resources for other parts of its mandate – in-depth investigations, legislation drafting, education and training for regulated entities.
Encouragingly, to some extent the FCA is already embracing technology in its long-term view. In the FCA’s 2019/20 business plan, FCA chair Charles Randell wrote: “Technology also brings risks to regulators who may lag behind developments or lack skills and resources to match the changing landscape.”
As a result, the FCA is re-evaluating its use of technology and is currently in the second pilot phase of its digital regulatory reporting (DRR) initiative. This was first mentioned back in 2017 and, following a tech-sprint with the Bank of England, is now being studied as part of a cost-benefit analysis in a pilot scheme involving several large high street banks. In short, DRR would allow firms to automatically and directly communicate with the regulator creating the potential for automated and straightforward processing of regulatory returns.
As part of their ongoing work, the FCA is busying itself to identify what data could be included in a standardised interface and to understand the difference in different models adopted by firms. Even more interesting, the FCA alluded that this could lead to “machine executable” regulation. Could we be set for automated regulation? An AI regulator even?
That is very hard to say. The pace of change in any regulatory department is slow and even the most black and white legislation has to go through numerous and lengthy consultation processes. The FCA is a public body and has to be extremely careful in how it goes about fulfilling its mandate, especially when it comes to how it spends its budget. Given the DRR was first mooted in 2017 and we’re nearly in 2020, we might not see revolutionary uptake of technology from the FCA for some time. MiFID II took years of drafting (which the FCA was heavily involved in) and the execution/collection of transaction reports since implementation has raised questions about the regulator’s adeptness in tech – which we covered in our blog here.
That said, like most regulators, the FCA knows it needs to change when it comes to its use of technology. Not least because technology is so widely used by financial criminals, but due to the fact the use of data is shaping the way financial services grows and how we interact with it.
If you’d like to recap on some of these issues, remember to subscribe to our blog (simply fill in the form on the right of the page). But, as FCA chair Charles Randell said, the time for regulators to re-evaluate and introduce drastic change in this use and understanding of technology may soon be upon us: “changes in technology… make it important for us to step back and consider what the future of regulation looks like.”
What can we do now?
The regulator’s adoption of technology is in their court. But this doesn’t mean technology cannot be embraced by regulated firms in their compliance. Here are just a few simple things for regulated firms to consider when evaluating where they could involve technology in their compliance duties.
Define a strategy and vision
‘Adopting RegTech’ is an admittedly vague aim, so it is important to analyse what this actually means for your firm. Take time to evaluate the current compliance demands on your firm and specific business activities, where are these the strongest? By taking time to analyse your own firm’s requirements and where compliance resources could be freed up, that will allow you to draft together a strategy and vision for the use of technology when it comes to regulation.
Invest in cultural change
One of the great things about technology, which we’ve touched upon in our examination of platform integration and centralisation as a megatrend, is the potential to break down silos and allow for information to be exchanged and ideas grown. It’s all well and good subscribing to some RegTech solution, but why does this just have to be the compliance department’s new resource? Analyse how technology is used by your team and identify where organisational changes could help departments flourish.
Invest in training and the right people
Shift the focus from box-ticking to outcomes, this cultural change will help the adoption of RegTech solutions and may even lead to them to be embraced beyond the compliance department. Remember, this needs to be backed up with education and training. If someone starts submitting regulatory reports in the wrong way, they could end up causing more harm than good. Take the time to make sure that everyone uses the technology correctly and maintain compliance standards. Hiring the right people with digital and tech-led skills will also be crucial. This will ensure the right decisions are made and technology is adopted with business objectives and the future in mind.
Another challenge in the world of financial services that will continue in 2020 is the ability to deliver personalisation experiences whilst remaining compliant. Take a look at our eGuide 'The Compliant Marketers Ultimate Guide to Personalisation' to hear expert advice on how to navigate this issue. We hope you enjoy reading our latest industry insights and always welcome your feedback!