All change please: the evolving regulatory focus

The annual speeches by the Chancellor and Governor of the Bank of England (BoE) at the Mansion House are always important dates in the diary for the financial services sector. This year’s speech was the last that Mark Carney will give as Governor and many expect that Philip Hammond will no longer be Chancellor once a new Prime Minister is appointed. In ‘normal’ times the replacement within a six month period of the two most influential financial services policy makers in the UK would represent an unusual amount of change. But as the sector currently faces a number of profound disruptions, challenges and opportunities, the 2019 speeches are more likely to be remembered as an important signal of the policy makers’ response to these. In May’s edition of our Being Better Informed publication we talked about regulation entering a new phase of focus, particularly highlighting Brexit, FinTech and Regtech, operational resilience and climate change risks as topics likely to increasingly drive changes in the regulatory agenda. The Chancellor and Governor’s speeches suggest we may be right in our assessment.

In his speech the Chancellor confirmed that HM Treasury (HMT) would be undertaking a long-term review of the UK’s regulatory framework post-Brexit. As we shared in our previous blog on the topic back in April, the review has the potential to significantly impact the financial services sector in the UK. The Chancellor also announced that in the short term HMT will focus on what steps can be taken to improve the level of coordination between the UK’s regulators to better manage the pace and timing of regulatory change in the UK. This is to be welcomed. As we noted in our report, Operational resilience: time to act, the extent of overlapping regulatory change since the financial crisis has increasingly placed operational strains on financial services firms and there is scope to take a more strategic and coordinated view to reduce the risk of operational overload. But for the exercise to have most impact the regulators will need to embed greater coordination throughout their organisations to reduce the risk of issues such as overlapping data requests. It will also be vital for firm’s to fully engage in the exercise to provide HMT with evidence on the burdens created by regulatory change and specific examples of how regulatory change could be better coordinated.

Technology is transforming financial services at a significant pace. Responding to this the Governor made a number of announcements which show the BoE is seeking to embrace the power of technology and to respond from a regulatory and supervisory perspective to innovations in the sector. The BoE has launched a review into its use of regulatory data, including how data could be automatically extracted by supervisors from firms, and the extent to which it can use AI and machine learning to analyse the data it receives. Regulatory reporting remains a challenge for many financial firms and we see significant scope to both improve the quality of reporting and reduce costs through the use of technology. Leveraging these innovations will however require investment from firms.

Over the shorter term the Governor also announced that the PRA will set out its approach to the supervision of the use of cloud computing by firms. Firms also are increasingly seeking to utilise AI, machine learning and data analytics to improve processes and how they interact with customers, and it is understandable that the regulators are responding to this, with the BoE and FCA establishing a forum to discuss the results of a survey on AI use in firms and to determine an appropriate supervisory approach. We see an increased focus on governance and accountability for the use of these tools as being central to this response. Further details on our views on the supervisory and regulatory implications of AI can be found in this blog but it is clear that firms will need to show that they have carefully considered how these developments impact their organisation, counterparts and customers and in turn who will be accountable for any new responsibilities this creates.

The announcements in the Mansion House speeches on technology are just the most recent example of an increased focus from the UK regulator’s on technology related developments. The FCA has also recently published its first report on the regulatory perimeter, noting its focus on the impact of BigTech companies increasingly providing financial services and the regulatory treatment of crypto-assets. Nick Cook, Director of Innovation at the FCA, has also recently given a speech1 suggesting a more activist approach from the FCA on technology innovation - an interesting development.

It was also good to see climate change related risks given such prominence in the Governor’s speech, and confirmation that climate stress tests will be conducted for financial institutions in 2021. Greater climate-related financial disclosures by companies and financial institutions is important to enable these stress tests, and the 2019 Task Force on Climate- related Financial Disclosures Status Report showed that while there has been progress, much more needs to be done.

This year’s Mansion House speeches were a welcome sign that policy makers in the UK are looking beyond Brexit. Next year the Mansion House speeches may be given by individuals that have a different outlook to the current incumbents. Despite this the sector will hope to see a continued focus on a more responsive, innovative and coordinated regulatory regime in the UK. What is clear is that as the financial sector innovates and evolves, policy makers in the UK are responding. This means the financial services sector will need to ensure key functions such as risk and compliance are ready for change and more broadly the sector must continue to embrace change to remain competitive. Understanding the implications of a changing regulatory landscape must be a key part of this strategy.

Conor MacManus

Conor MacManus | Director
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1 From Innovation Hub to Innovation Culture Speech by Nick Cook, Director of Innovation at the FCA, delivered at the 6th Central Bank Executive Summit

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