As Woody Allen once quipped:
“If you want to make God laugh, tell him about your plans.”
Those responsible for defining the 2020/21 business plans for the UK’s financial regulators – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) – have had to significantly alter them in response to the COVID-19 pandemic. Regulatory deadlines have been pushed out and some planned activities have been paused or even cancelled in order to focus the regulators’ resources and allow financial firms to concentrate on their response to the crisis.
Notwithstanding this, there are some useful takeaways for RegTech firms contained in the detail of the plans (though, of course, these are all subject to change in the current environment).
1. Regulatory Reporting and Data Collection
Following the Bank of England’s discussion paper on data collection issued in January 2020 and the publication of the FCA’s Data Strategy in the same month, both regulators are signalling their continued focus on streamlining the collection of data and regulatory reporting to reduce the burden on financial firms. This year will see the Bank of England, the PRA and the FCA consulting widely with the industry to build on the work conducted as part of the Digital Regulatory Reporting pilot.
2. Internal Adoption of Technology
The FCA’s updated data strategy is also a key part of the regulator’s own internal transformation to increase efficiency and effectiveness in its work, with further investment in new technologies and skills over the next year.
“We need to consider how we prioritise and deliver outcomes, how we use data and technology, what capabilities we need to be fit for the future”
Being more specific, though perhaps less ambitious, the PRA signalled that it will be commencing work to make the PRA Rulebook machine-readable – something that the FCA has already achieved. This will be good news for those RegTech firms with solutions enabling financial firms to map regulatory rules and obligations to policies and controls.
3. Financial Crime
Financial firms will need to ensure that their processes, systems and controls to prevent financial crime are robust, rigorous and effective as the FCA is planning to strengthen its anti-money laundering rules in 2020/21. Fraud in the payments sector will also be an area of focus, with the FCA assessing the adequacy of systems and controls to “detect, disrupt and reduce the risk of financial crime”.
4. Digital Finance and Fairness
One of the FCA’s five top priorities is about fairness in digital finance, particularly around the pricing of products and the differences in pricing between existing and new customers. Issues of access and quality will also be important but the FCA seems to be quite focused on dealing with price discrimination, which includes ensuring the data and algorithms that may underpin digital financial products should be used ethically and do not have an undue bias.
There is an opportunity here for RegTech firms to offer solutions which can evidence fair pricing and value offered to customers.
5. Vulnerable Customers
As in the past couple of years, the FCA maintains its focus on vulnerable customers, especially those that are digitally disenfranchised and those that may be more exposed to economic harm as a result of the coronavirus pandemic. Again, firms will need to demonstrate that they are operating in a way that ensures fair treatment of vulnerable customers.
6. Smaller, Newer Firms
Interestingly, both the PRA and FCA single out smaller firms in their business plans. The FCA issued a warning shot across the bow for smaller firms who ‘fail to meet our required standards’ and the PRA intends to pay attention to newer firms whose business models are less mature. Perhaps this may encourage these smaller firms to adopt RegTech as a means of ensuring adherence to regulatory standards.
7. Artificial Intelligence
Artificial Intelligence (AI) is the only specific type of technology mentioned in both business plans – with the PRA announcing further investigation into how AI and machine learning (ML) applications are evolving in the financial industry. Similarly, the FCA also intends to deepen engagement with industry and society around the use of AI and ML. The FCA and Bank of England have jointly established the Financial Services AI Public Private Forum (AIPPF) to facilitate this.
RegTech itself is called out by both the FCA and the PRA – the former is keen to understand how its regulatory sandbox can be expanded further to encourage the wider adoption of RegTech whilst the PRA states its ‘commitment to remain a thought leader on RegTech and to deliver a world-class RegTech strategy’. There is no detail as to what this strategy entails, however. These statements are clearly a good sign for the RegTech industry, though it is not clear how this stated support for RegTech translates into supervisory expectations on the ground.
9. Operational Resilience
2020 will see the publication of the regulators’ final rules on operational resilience, though the deadline for responses to the 2019 consultation has been extended due to COVID-19. This year will see both the FCA and the Bank of England evaluating firms’ contingency plans – many of which will have been executed as a result of the current crisis.
10. Climate Change
The PRA approaches climate change risk from the perspective of the risk that it poses to the economy and the financial system, and will be preparing this year for the next stress testing scenario to explore the resilience of the system to the risks of climate change. The FCA, on the other hand, is considering climate-related disclosure rules and how ‘green’ retail products are designed so consumers can make informed decisions about them. The activities of both regulators present significant opportunities for technology firms to start creating solutions to help financial firms better manage the various risks of climate change.
If this has been helpful and you’d like to hear more about how we can help you make the most of the opportunities emerging from these regulatory plans, please get in touch.