RegTech gains momentum with FCA roundtables

March 22, 2016 6 minute read

No longer just murmurs and forecasts, support for the UK’s world-leading RegTech community gained momentum this month, mobilising for take off in a series of roundtables held by the Financial Conduct Authority (FCA). It follows the FCA’s call for input, in late 2015, into how they can support the development and adoption of RegTech, and barriers facing innovation in the space. We were pleased to be in invited to participate in the first roundtable, hosted by Burges Salmon, and joined representatives from RegTech providers, banks, law firms, asset managers and academics to support the FCA. The roundtable opened with a summary of key themes that came out of the responses so far:

  • Collaboration and engagement
  • Clarity on regulatory position
  • Data standards
  • Credibility for new technology
  • Legacy infrastructure of big players

Discussions were lively and diverse, though with many different stakeholders coming together for the first time, this first session didn’t allow a deep dive into all of the issues we face in the FinTech ecosystem. Here are our highlights from the common challenges and ideas explored so far:

Engage and communicate with the RegTech community

No surprises that there was a common call for better communication and collaboration between industry players: the regulator, the regulated and the technology providers. Regulators need to understand what is possible with new technologies, where things need to improve and what challenges to address with new regulations. Better communication would also give more steer for the technology provider earlier on – all too often a solution is prototyped and then built – only to find out if it’s good enough after a year on operation. In another example raised, there is a lot of duplication of reporting in the industry – the same amount of information needs to be provided to companies as to the FCA so a joint up approach would streamline and reduce workloads. Suggestions included a quarterly consultation group which could facilitate regular, structured conversation around the development of RegTech, to help outline actionable change towards innovation.

Educate all sides

Many suggested the FCA should play more of an educational role in the market. We believe they could support RegTech providers by offering training on regulations for technology people. If developers better understand the regulations, then they can build better RegTech solutions for compliance in financial services. On the flipside, there needs to be better technological competence an education inside the FCA itself. Concerns were raised that a compliance audit, such as an FCA licence application, can be seen as just a ‘box ticking exercise’ – auditors rarely ever ask questions about the integrity of technology, and so there is no pressure on the firm improve. What’s more, some regulations are outdated or irrelevant for new technologies and business models – and better understanding on both sides can shape better outcomes.

Offer a seal of approval

There was a solid call for, and discussion around the potential for the FCA to provide a ‘kitemark’ to indicate service quality of technology providers. This way financial services could trust new technologies and feel confident the FCA understands and approves of the provider. This would open up opportunities for firms who wouldn’t currently take the risk, while giving credibility and benchmarking innovation for the providers.

Clearer standards, guidance and best practice

The message from the regulator always needs to be consistent and agreeing on standards would help define clear expectations. With different standards between regions like the US and UK (for example what a ‘strong password’ looks like), firms just want to know quickly and easily which approach to use when entering another jurisdiction. It would also help to be clearer with the customers of financial services on regulations and define what the minimum standards are. This example came from the private banking sector, where compliance costs are huge, and as much of this costs is tied customers, it’s likely they would invest to help.

We also believe the FCA could support RegTech by showing the way with best practice examples – tell the industry what good and bad practice looks like. It’s felt that the current guidance out there is hard to find.

The word from the FCA

There was a collective view that the FCA focuses mainly on the principles and outcomes for regulations, but does not offer practical guidance on how to get there. You’ll get told if your compliance is too weak or if you’re caught getting it wrong – but not how to get it right. The FCA response to this was honest and pragmatic – in reality, they can’t define standards on what is good without becoming a bottleneck. They understand that we want clarity – but without a huge increase in resources they can’t keep up with technology and would slow things down.

The FCA were also clear that they cannot say whether a technology solution meets regulations or not. So it looks like an endorsement for RegTech providers is not going to be on the agenda any time soon.

They also reminded us that their focus is on the consumer – it’s this group who are their main motivation behind supporting the development of RegTech. They want us to develop communities; help the unbanked, improve social mobility and help fight social exclusion with our products and services.

Overall, the message from the session was that if it’s seen as being in ‘the too hard camp’ – the FCA won’t be able to do it. The clear focus is on achievable, the low hanging fruit in the near future.

Where we see opportunity to support innovation and growth

This first roundtable facilitated an interesting start to discussions on industry pains and challenges, while offering up some innovative solutions and sometimes niche ideas on the future of the FCA and RegTech. It only just scraped the surface though, and discussions will likely evolve in the following weeks and months. At ComplyAdvantage, we believe there’s more to be done by the role of the regulators, which can improve by:

  • Publicly stating the direction of future regulations, including the problems they want to solve, and state that the preferred method to get there is digitisation.
  • Engaging with Regtech providers on what is possible and where things need to improve – such as a quarterly consultation group. The industry is changing very fast, so best practice needs to be reviewed with input from RegTech providers.
  • Actively driving innovation in financial services by implementing incentives for best practice and penalties for not reviewing and seeking better ways to meet their compliance obligations. If the FCA stated that yesterday’s technology is not good enough, there would be tangible pressure to proactively improve their compliance technology. In addition, frontline audit staff need to know what is possible with technologies so they can truly assess whether a firm is doing all they can to be compliant and reduce financial crime. For example, to prevent anti-money laundering, manual retrospective sample checks on transactions is not good enough when there is an automated technology solution available.
  • Taking on an educational role in the market – such as hosting roadshows, providing publications, and also taking accountability of the education of their team.

Find out more about the final roundtables here. We look forward to hearing more from the FCA, who expect to close the call for input after the series has finished so they can share their findings.