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Payments & FinTech Lawyer

FCA issues Call for Input on RegTech proof of concept and suggests options for global regulatory sandbox

The UK Financial Conduct Authority (‘FCA’) released on 20 February 2018 a Call for Input ‘on the use of technology to achieve smarter regulatory reporting’ (‘Call for Input’), in which it seeks views on the use of technology to make regulation more efficient and to reduce the regulatory burden on firms.

In particular, the FCA in the Call for Input puts forward a proof of concept developed at a ‘TechSprint’ event run by the FCA and the Bank of England (‘BoE’) in November 2017; the proof of concept would make regulatory reporting requirements machine-readable and executable, potentially allowing firms to develop automated processing of the regulatory reports they are required to submit to the FCA based on their financial activities. Such automated processing would have benefits in terms of the consistency and efficiency of regulatory reporting, improved data accuracy, and in the ability for changes to regulatory requirements to be implemented faster, for example.

“This is a positive step,” said Sue McLean, Partner at Baker & McKenzie LLP. “The regulatory reporting burden faced by firms is immense. The FCA has been talking about RegTech for some time and has been encouraged to embrace technology in the context of regulatory compliance, so it’s welcome that it is now actively seeking input in this area. Introducing a machine-readable and executable rule could really help make regulatory reporting more efficient. The existing rules can be very difficult to navigate, particularly for new players. Reducing the need for human interpretation and manual execution of reporting could bring significant efficiencies and cost savings, which in turn might help lower barriers to entry.”

However there may be regulatory rules or policies that could serve as barriers to the implementation of such a proof of concept, and through the Call for Input the FCA is interested in learning the industry’s views on this. “One potential regulatory and policy barrier concerns the responsibility of firms and senior managers for regulatory reporting. When things go wrong today, the FCA is well known for taking aggressive enforcement action. If the reporting is executed automatically using ‘automated interpretation,’ who is responsible if the data is incorrectly submitted? Rules over systems and controls may require review,” notes McLean. “A further barrier arises from the attempt to make reporting rules less reliant on human interpretation. The proof of concept requires more clarity to definitions of terms in the rules and this will require the FCA and BoE to create more detailed definitions. This need for greater precision may create rules which are insufficiently flexible to capture the circumstances of every business, making compliance difficult for certain firms.”

Responses to the Call for Input are due by 20 June 2018, and there will be roundtables over the coming months to discuss the associated issues; following this, in summer 2018 the FCA will publish a feedback statement in regards to the results of the Call for Input and the roundtables.

Separately on 14 February 2018 the FCA published a statement with a view to gathering industry’s thoughts on the creation of a global regulatory sandbox, in which the FCA would work with regulators in other jurisdictions in order to allow firms to test products across multiple jurisdictions, rather than just in one country as with regulatory sandboxes currently; responses to the FCA consultation on the matter were due by 2 March 2018.

“Many FinTechs have global aspirations, so developing a global sandbox to help firms with their cross-border objectives could be hugely beneficial,” said McLean. “In addition, there are definitely areas where cross-border testing could be really helpful. For example, the decentralised world of DLT, cryptocurrency and ICOs doesn’t respect territorial borders. The founders of these types of company often want to understand the potential legal and regulatory implications of their business models in a variety of different jurisdictions. At the moment they have no choice but to approach individual regulators and potentially get involved in a whole series of different sandboxes.”

The FCA admits that creating a full multilateral sandbox would be an ambitious project, but discusses a number of ways in which the global sandbox could work and the aims it could have. These include working to identify cross-jurisdictional regulatory issues, such as in regard to AML for instance, and involving both firms and regulators to work together to find solutions; another aim for such a sandbox might be to offer firms who wish to grow at scale in different markets the ability to bring their idea to market more readily, thus promoting competition. The FCA explains that the “overall approach would be to better understand and solve common regulatory problems, as well as being more helpful to firms who have aspirations to grow at scale in multiple markets.”

“What seems more likely than a truly global sandbox is that a group of the most progressive regulators with established sandboxes may come together to explore how they can cooperate better and share information and best practice,” believes McLean. “The viability of such an initiative may also depend on which regulators end up taking part. If certain regulators in key financial services markets (e.g. US, Singapore, Switzerland) don’t get involved, the value of the sandbox is likely to be reduced. Above all, in order to be a success, the process must not disrupt the working of existing sandboxes and innovation programmes. What FinTechs keen to get to market quickly certainly won’t want is a global sandbox that results in making the regulatory testing process longer, more complex and less efficient.”

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