Part five of our FCA Priorities series looks at innovation, data and data ethics including what the FCA will expect from you and your firm in the coming year.
Recognising the changes being driven by data and technology in financial markets, the FCA's business plan stresses the need for it to fully understand the changes taking place, the risks they pose, and its own role in shaping financial markets.
The FCA is committed to supporting innovation, provided that innovation leads to more effective competition and is ultimately in consumers' interests.
Priorities for the FCA include:
The FCA is aware that the growth of open finance, and the market in data, could lead to firms with greater access to data and tech ability having a competitive advantage in the market to the detriment of consumers. The FCA is accordingly keen to explore consumer benefits from requiring data to be shared more openly, as part of the wider debate on the effectiveness of open finance and open banking, and the opportunities presented such as in relation to increased competition in the savings market.
It has plans for a cross-sector industry event to raise awareness of data aggregation initiatives and identify scope for industry collaboration, envisages an open finance advisory group being created, and will call for input ahead of publishing a report on shaping the development of open finance. It will also launch a Credit Information Market Study looking at the operation of credit referencing agencies in response to data and technology developments.
Algorithmic decision-making is on the rise in financial services, rendering data ethics increasingly important. The public must trust that the use of its data is transparent and accountable, and that decision-making is free from bias. Data use must also be well governed and in both consumer and market interests.
The FCA intends to undertake firm surveys, roundtables and supervisory conversations to explore data use and machine learning's shaping of products and services. The FCA will also consider what this means for consumers and the functioning of markets. The FCA will also assess whether its Treating Customers Fairly principles need to be updated to incorporate data ethics.
As set out in the October 2018 Cryptoassets Taskforce report, the FCA in conjunction with the Bank of England and Treasury concluded action was required to deal with the risks associated with cryptoassets falling within the existing regulatory framework. Consultation and international coordination is required to assess cryptoassets sitting outside the current framework.
The FCA intends to publish a Feedback Statement and Perimeter Guidance following its consultation. It will also advise the Treasury on extending the perimeter in relation to utility and exchange tokens and extending financial crime provisions concerning particular cryptoasset activities.
In its role as chair of the Global Financial Innovation Network (GFIN), comprising 29 global regulators and bodies, the FCA will promote innovation and share knowledge and best practice on its effects on financial markets. It will also run cross-border trials with 17 other regulators evaluating GFIN's globalist approach, including barriers to innovation.
The FCA has identified three RegTech priorities for the year:
The FCA will further explore the business case for Digital Regulatory Reporting (DRR) with the Bank of England and industry players. This follows the production of its Pilot Phase 1 Report on DRR which provided the FCA with a better understanding of how DRR could be delivered and the challenges presented by roll-out.
The FCA will also host an international TechSprint on AML and financial crime. This TechSprint will include the testing of Privacy Enhancing Technologies, the results of which experimental work will be shared externally with a view to encouraging the adoption of new technology to improve AML and financial crime detection rates.
The FCA will also be running workshops to identify innovative tech supporting vulnerable consumers.
It has long been perceived that regulation stifles creativity.
The FCA is seeking to dispel this myth, and as referenced above has an ambitious national and international agenda for promoting responsible and consumer orientated innovation in financial services in all its forms.
In his speech at the Innovate Finance Global Summit on 29 April 2019, Christopher Woolard (the FCA's Executive Director of Strategy and Competition) spoke passionately about the "FCA's innovation journey". That journey has seen Innovate evolve from being a two employee FCA project to an entire division with global reach within 5 years.
Mr Woolard pointed to various examples of the impact Innovate was having (fully set out in the FCA's report, "The Impact and Effectiveness of Innovate") in terms of giving firms with positive, innovative business models the regulatory support and certainty they need to go to market and thrive. Examples included:
The success of Innovate, and particularly its regulatory sandbox, has led to the creation of GFIN and the launch this year of its global sandbox.
Mr Woolard emphasised that the global approach recognises pressing FS issues are often cross-border in nature (such as financial crime, where currently only an estimated 1% of illegal cash flows are either seized or frozen). Accordingly, where possible they should be tackled on a cross-border basis. Global collaboration, and the sharing of ideas and know-how, drives competition and leads to greater benefits to consumers than national regulators operating in isolation.
The FCA's ultimate ambition is to encourage innovation in the interests of consumers and perhaps the sandbox is the best example that the FCA is moving towards fulfilling that ambition.
A far cry from being wary of FCA oversight and supervision, firms are now clamouring to be accepted into the regulatory sandbox and are emerging at the other end with their credibility and investability enhanced as well as their business propositions being market-ready.
The FCA's Innovate report gives several examples of these propositions having the potential to offer real benefits to customers, including insurance products giving consumers access to more comprehensive coverage, improving claims processes and account aggregator apps and platforms enabling users to save more and better understand their finances.
Regulatory success is not easy to measure, but the FCA must hope it is on the right track.
Contributor: Robert Naylor
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2019. Specific advice should be sought for specific cases. For more information see our terms and conditions.