FCA calls for technology for ‘smarter’ regulatory reporting

The Financial Conduct Authority (FCA) wants technology providers and regulated firms to share ideas about how regulatory reporting requirements can be made simpler and more consistent.

In a “Call for Input” issued last month, the United Kingdom’s financial services regulator has asked for financial services firms, regulatory technology (RegTech) providers, software developers, and other interested parties such as professional services firms and academics, to come forward with ideas as to how technology can help firms meet their regulatory obligations, help the FCA improve its supervisory and monitoring work, and re-shape and bolster current regulatory processes and systems.

The FCA wants to cut the amount of time that firms may take meeting “burdensome” reporting requirements, while also cutting down its own workload reviewing such reports. The FCA says that every year it receives over 500,000 scheduled regulatory reports from firms, as well as additional ad hoc reports.

Currently, U.K. financial services firms have to report on their compliance with rules in the FCA’s Handbook, EU regulations and directives, as well as national legislation. The level of detail that firms need to report differs depending on the size of the organisation, yet confusion persists over what information should be included in the reports that firms need to submit. The FCA says one of its main challenges is that it cannot change its reporting requirements quickly, as firms need time to interpret and implement its policy changes and make the necessary alterations to their reporting systems, which “creates an unavoidable delay” and “increases the need for us to make additional, ad hoc requests for information from firms, adding to their compliance burden.”

Consequently, “firms can find it difficult to meet these obligations,” the FCA admits. “Many tell us it takes them significant effort to navigate and interpret the Handbook and instead rely on external professional services to understand what information we need and when. Firms then implement and codify these interpretations into their in-house regulatory reporting systems. Each firm does this manually, creating the risk of different interpretations and inconsistent reporting,” says the regulator.

The FCA is looking for feedback from technology firms in particular about how regulatory reporting can be made simpler and more consistent. Last November, it held a two-week event with the Bank of England—nicknamed TechSprint—to explore the potential for a fully automated process that firms could use to provide their regulatory returns. Some of the organisations involved included the Governance, Risk and Compliance Technology Centre; law firms Linklaters and Burges Salmon; RegTech company Regnosys; accountancy Grant Thornton; and banking heavyweights Credit Suisse, HSBC, and Santander.

“Technology is a powerful shaper of financial regulation, able to make compliance simpler and more efficient. We look forward to working with industry participants in the coming months to drive these ideas forward.”
Christopher Woolard, Executive Director of Strategy and Competition, FCA

The event proved promising: The FCA found that it could be possible to turn a set of reporting rules into a machine-readable language, which would then allow IT systems to automatically execute the rules and provide the necessary information, eliminating the risk of different human interpretations of the same regulations. This would result in consistent reporting across the industry.

As well as demonstrating that machine-executable reporting was possible, TechSprint also highlighted the opportunities that could be gained through deeper cross-industry collaboration. For example, the event explored how setting up a crowdsourcing Website could help develop an industry-wide body of knowledge to assist firms with improving their understanding of the rules and stamp out ambiguity over legal and regulatory definitions.

Following TechSprint, the FCA is keen to pursue an “open source” approach to improve regulatory understanding. “As we do not believe that interpreting and meeting regulatory reporting requirements does or should deliver a competitive advantage to firms, we will continue to follow an open-source approach to take this work forward,” says the regulator.

“Open sourcing encourages collaboration by freely sharing technological information to improve solutions. This approach also allows participants to tailor and adopt technology more easily and cheaply and adapt it to meet the specific needs of individual firms,” it adds.

The potential benefits of moving to machine-executable regulatory reporting

The FCA believes that automating the regulatory reporting process could provide significant benefits for regulators and firms through:
Increased clarity. Reducing the ambiguity of the FCA’s reporting rules would reduce the need for firms to interpret them and make the information they send the regulator more consistent. Firms could be more confident about what the FCA expects from them and that they are complying with its rules.
Increased efficiency. Automated “straight through” processing of regulatory reporting could save the industry significant costs. This could free up human resource and capital to innovate, improving the products and services they offer to consumers. Greater efficiency and the removal of the need for human interpretation could also help competition by reducing the barriers to new firms entering markets.
More responsive regulation. Machine executable reporting creates the potential for firms to automatically update current rule requirements and future changes in their systems much more quickly and cheaply.
Higher-quality data. The technology provides the potential for the FCA to collect more detailed, granular data. This would allow it to analyse more areas of the market in greater depth and variety. Higher-quality, more consistent data, collected more quickly, would enable the regulator to identify and monitor issues and risks more efficiently, diagnose harm and potentially intervene earlier.
Source: FCA

The FCA believes that machine-readable and machine-executable regulatory reporting can bring several benefits—namely increased clarity, increased efficiency, more responsive regulation, and higher-quality data.

It believes that by automating regulatory reporting, ambiguities around interpreting rules would be reduced, which would ensure that “firms could be more confident about what we expect from them and that they are complying with our rules.” Automated “straight-through processing” of regulatory reporting would also reduce industry costs and improve efficiency.

Furthermore, the FCA believes that machine-executable reporting creates the potential for firms to automatically update current rule requirements and future changes in their systems much more quickly and cheaply, while the technology allows the regulator to collect more detailed data that can be used to analyse the market and monitor risks more effectively, as well as potentially intervene earlier.

Despite the benefits, however, the FCA recognises that there are some major hurdles to overcome in the process.

For example, while the proof of concept may have shown that machine-executable reporting is possible, the regulator does not know how the process should be implemented or what governance mechanism should be introduced into a process “where the participants are effectively co-creating the final solution.”

Another potential problem is convincing the industry that there is a compelling business case. There are also possible legal ramifications, too, as not all firms may want to opt in to a machine-executable reporting mechanism, and the liabilities of those providers who carry out such services for financial firms may need to be spelled out.

Having automated reporting would also impact the FCA’s work. The regulator says any move to implement machine executable reporting and be a more technology-driven regulator would require “both upfront and ongoing funding”—some of which would need to be recoverable from the industry.

Lastly, the initiative would require regulators in other jurisdictions to follow suit or collaborate—otherwise, the FCA is just adding to industry costs. The FCA has asked for feedback from standard-setting bodies on “what would help the implementation of a machine-executable reporting regime across different jurisdictions.”

The FCA is calling for responses to its “Call for Input” by 20 June and plans to publish a feedback statement this summer. It is also setting up a series of roundtables hosted by TechSprint participants to discuss “relevant legal, technological, and regulatory issues” that interested parties—including compliance professionals—could attend.

“Technology is a powerful shaper of financial regulation, able to make compliance simpler and more efficient,” says Christopher Woolard, the FCA’s executive director of strategy and competition. “We look forward to working with industry participants in the coming months to drive these ideas forward.”