A review of the FCA and BoE's work on digital regulatory reporting and what it means for the future of authorised firms' regulatory compliance.
In November 2017 a group of technologists, academics, professional advisers and regulators succeeded in proving at a TechSprint instigated by the FCA and Bank of England that a regulatory requirement contained in the FCA Handbook could be turned it into a language that machines can understand.
Amongst the myriad regulatory developments of late, not least the introduction of GDPR and MiFID II, news of this project has largely gone under the radar; but do not underestimate its significance. The Financial Conduct Authority (FCA) and the Bank of England (BoE) now have confirmation that automated digital regulatory reporting is a possibility and the question they are now considering is: how might it be implemented?
What is digital regulatory reporting?
Regulatory reporting by authorised firms is a heavy compliance burden. The rules are complex and require interpretation against each firm's specific activities. Firms also need to be able to locate the relevant data and convert it into the correct format for the purposes of reporting. This requires a significant amount of resource and does not mean that the regulator will agree that the reports are appropriate.
Digital regulatory reporting proposes to turn that process on its head. It would create an automated process to mine and collect the data of authorised firms based on a predetermined interpretation of the relevant rules and which would be reported to the regulators in a common format.
A number of technologies are likely to be utilised in any solution that it implemented, including:
- distributed ledger technology to facilitate commonly accepted rule interpretation
- artificial intelligence and machine learning for data mining
- natural language processing tools for processing information.
Putting all these (and many other) technologies together is a complicated challenge but one that has been proven to be possible.
What are the implications?
For regulators and firms, this means they can be certain that the information that they are asking for and providing is the exact information that is required. That, in turn, makes supervision more effective. Regulated firms are also likely to be able to save on legal and compliance costs.
More importantly, however, the regulators would be able to implement changes to the regulations in almost real-time. At present, the process for implementing reporting rule changes is a lengthy one:
- The regulators issue consultations and proposals.
- Authorised firms respond and consider the implications.
- Firms also hire lawyers and professional advisers to give opinions on the interpretation of the proposed rule changes and their effect on the data reporting obligations of the firm.
- IT and compliance teams update the internal processes for collecting data and updating the report templates.
In the new world, the regulators could implement a rule change and the digital regulatory reporting system would instantaneously pick up the revised data set and report the relevant values back to the regulators.
How long until this is a reality?
The FCA’s TechSprint concluded in December 2017. It successfully implemented a technology solution capable of mining a dataset in order to extract the relevant information in order to report a balance sheet field in compliance with SUP 16.12.This provision of the Supervision sourcebook of the FCA’s Handbook deals with integrated regulatory reporting and specifies what data should be reported to the FCA to enable it to analyse firms' financial resources and other conditions and performance of their business.
Following that it issued a Call for Input and simultaneously ran a series of seven roundtable discussions with the financial services industry. Burges Salmon and Grant Thornton jointly hosted one of those roundtables at which representatives from the financial services industry discussed the potential opportunities, limitations and operational realities that a project of this nature would entail. The output of those roundtables was collated by each of the hosts and fed back to the FCA as a response to the Call for Input, which closed on 20 June 2018.
Some of the key themes to come out of the roundtable hosted by Burges Salmon and Grant Thornton were:
- How best to initiate a project of this nature and scale - how big should it start and who should be involved?
- How feasible is it to expand the scope of the project to the whole Handbook rather than just the one field it was successful for at the TechSprint?
- Will digital regulatory reporting cause a cultural shift away from principles-based regulation?
- Who will pay for the implementation?
- Is the FCA ready to change its own culture and no longer rely on ad hoc data requests from firms?
The FCA is currently considering all of the responses to the Call for Input and is due to issue a feedback statement in Q3 2018.
What is the potential?
We will know more about the future direction of this project once the policy statement is issued, but if the regulators are to propose some more steps towards the potential implementation of digital regulatory reporting on a wider scale then the next few years could see a real step change in how regulated firms and their regulators deal with each other.
With a bit of innovative thinking it is also not inconceivable that the whole Handbook could, one day, be entirely automated; the ramifications of that would be huge