On 7 January 2020 the Financial Conduct Authority (FCA) and the Bank of England (BoE) published documents detailing the financial regulators' plans regarding the collection and analysis of data. The FCA released its Data Strategy, whilst the BoE requested stakeholder engagement through a discussion paper: "Transforming data collection from the UK financial sector". In a connected work stream, the FCA and the BoE have, along with seven regulated firms, published a Viability Assessment on the latest Digital Regulatory Reporting (DRR) pilot.
The FCA data strategy
An increasing number of regulated firms are developing and using advanced data techniques. The FCA's strategy shows that it recognises that, in order to continue to effectively supervise firms that it regulates, there is a need to not only understand these developments, but to keep pace with them in its own processes. Adding to these developments, the number of regulated firms is increasing, so the sheer volume of data that the FCA must analyse is also increasing. The resources that the FCA has are not increasing, or at least not at the same rate. Therefore it needs to transform its technology and data processes in order to supervise firms effectively. The outcomes that the FCA is seeking to achieve over the next five years are, in summary, to:
- gain a deeper understanding of how the market works and consumers behave, to shape its intervention
- identify and respond to problems in firms and markets to intervene and minimise harm earlier, and
- build a flexible and future-ready organisation to react quicker to market changes and shifting priorities.
In this document, the FCA states that it wants to be "smarter" in the way that it uses data and advanced analytics, both of which have advanced significantly in the six years since its last data strategy was published. It says that this transformation will reduce the burden on firms, and allow the FCA to use data to review where harm has historically occurred, detect where harm is occurring, or predict where harm may occur in the future. The FCA hopes that it will also be able to streamline its processes, making it more efficient.
The scope of planned transformation work is ambitious, especially considering the FCA's other change programmes, most notably those around Brexit. In the next twelve months alone, the FCA aims to:
- make its data science resource a core capability, and increase data and analytics skills through a learning and development programme
- test and deploy new tools, including web scraping, network analytics and natural language processing
- look at how new tools and techniques may be used to transform the detection of financial crime, and
- investigate how the interface between the FCA and regulated firms may be improved.
The FCA has already started work to move to a replacement for the Gabriel system, as announced in July 2019.
The BoE discussion paper
In 2018, the BoE established a committee, chaired by Huw van Steenis as Senior Adviser to the Governor, to conduct a review of the future of the UK's financial system in the context of the BoE's agenda and capabilities. The completed report, titled the "Future of Finance", was published in June 2019. A major part of the review was concerned with data: both the scope to use increasing data to monitor the market and assist in identifying irregularities, and also the risks of data storage. The report concluded that the BoE and the Prudential Regulation Authority (PRA) need to "embrace" digital regulation in order to increase efficiency and effectiveness.
Over the past ten years, the volume of regulatory reporting that firms are required to provide has increased significantly, placing a significant burden on regulated firms. As well as structured regular reports, firms are often required to provide regulators with detailed responses to ad-hoc data requests (which are difficult to automate). Regulators are not necessarily aligned, meaning that whilst underlying data sets may be similar, firms might be required to provide different reports to different regulators.
In its response to this report, the BoE noted that one of its priorities was to "deliver a world-class regtech and data strategy", with the aim of reducing the reporting burden and enhancing supervision, leading to a safer financial system. One of the elements identified as a step towards this was to "identify and implement improvements in the BoE's use of data...including better tools for peer analysis, and beginning to explore the benefits of machine learning and AI for regulation and supervision". The BoE's discussion paper kicks off this consultation period, which will end on 7 April 2020.
The DRR pilot
DRR has the potential to allow firms to automatically supply data requested by the regulators, reducing the cost to firms of data collection. The regulators also expect DRR to improve data quality, enabling the use of advanced analytical techniques as mentioned above. The DRR viability report concludes that there is merit to development of DRR, and that further resources should be committed to development and implementation of a business case for DRR. However it stops short of making a single recommendation for how DRR should be implemented, instead providing a number of implementation scenarios based around the one area of reporting involved in the pilot: UK mortgage reporting.
Work on DRR will be ongoing, and the FCA and BoE have committed to continue to work together and with industry partners to plan future phases of the DRR project. If successful, DRR could substantially reduce the amount of time and money that regulated firms need to commit to regulated reporting. In the short-term, however, implementation is likely to be complex and require significant changes to how firms label data internally, and how (and in what format) regulators ask for data.
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