Last Thursday, Philip Hammond launched the Government’s Fintech strategy, including this initiative to explore model-driven, machine-executable regulatory reporting – I’ll call it “MER” from now on to keep the acronym short!
Having been deeply involved, with many others, in the development of MER over the past 6 months, it’s clear to me that while the potential compliance cost reduction highlighted in the strategy is important – both in itself and in providing a large chunk of the impetus behind the work – it’s far from the only thing. Here are three major implications for starters:
1. Collaboration is king: I’ve written about this before, and if you’ve seen other posts on MER they typically contain an infeasible long list of call-outs to different individuals. I’m not going to repeat these here but do want to stress that this isn’t a put-on. Not least, the collaboration between the FCA and the Bank/PRA has been exemplary, and much else has flowed from it. The success of MER, to date and in the future, really does depend on this continuing collaboration – both horizontally between competitors and vertically between different professions (academics, lawyers, regulators, professional services, FS firms and technology firms).
2. Less ambiguity, more judgement: For MER to work, regulatory rules will need to be written much more precisely. This will remove a lot of the current ambiguity that firms have to interpret, often with the help of lawyers and consultants. However the judgements that remain are likely to be more visible and possibly more obviously acute in their impact. For example, both firms and regulators might well be able to model their impact in advance, which could make the largely implicit trade-offs that take place now a good deal more stark.
3. Business models will change: if MER is successful, this could well be profound for both FS firms and regulators. For many years I’ve thought there was quite a lot lost in translation through the process of regulation, and my experience since departing the regulator 18 months ago has only reinforced this. The FCA vision for MER is what they term “frictionless” regulation. This is often seen solely as meaning the friction between firms and regulators; in fact, however, much of the existing misunderstanding stems from the combined effect of friction between different parts of the firm and friction between different parts of the regulator. MER’s promise of much greater transparency, flexibility and accuracy has the potential to wash away a lot of this and could trigger moves to wholly different organisational structures.
MER is a hugely important initiative for regulation as a whole, not by any means confined financial services. It is undoubtedly progressive both approach and nature, but it would be a mistake not to realise there is an element to it of eating from the tree of knowledge. And so it would be equally mistaken, critically important though it is, to think of MER purely as cost reduction. A great deal more is in play here.
This Fintech Sector Strategy is all about the action the government has taken to make the UK the best place to start and grow a Fintech business, and what else we plan to do to maintain this position.