I first became fascinated by the intersection between innovation and regulation a year ago, when I was scrum master for the FCA’s TechSprint on Digital Regulatory reporting (DRR). The focus on governance came a few months later following the FCA’s Call for Input, when Grant Thornton co-hosted three roundtables to help regulated firms and vendors come together with the regulators.
The link below goes to the FCA’s feedback statement on its Call for Input, which sets out where the initiative has reached. It has the potential to revolutionise the operating models of firms, regulators and professional services, with major benefits for the both industry and consumers. But releasing that potential is anything but straightforward and is likely to need some radically new strategies.
Governance may be the single most critical issue to resolve in DRR, and will probably decide how successfully and how quickly technology’s benefits will have an impact on financial regulation.
There are two main reasons why regulated firms, vendors (both large and small) and regulators need to find ways to work together on DRR:
1. Regulators don’t in practice have access to sufficient resources – either financial or technical – to develop DRR by themselves. Nor can they realistically maintain a high enough risk appetite to cope with the inevitable failures along the way.
2. Both regulated firms and vendors need the regulators to be in the room, actively participating, and potentially ready to collaborate on a case by case basis. Their presence provides legitimacy, and confidence about the direction of travel. It also generates trust that discussion can be relatively open without intellectual property being appropriated by others. And it counters any temptation to confine membership to the largest players, thereby forcing barriers to entry to remain low.
It is, however, extremely difficult for regulators and firms to work together, or to sustain it over the long haul. New technology will continually bring new stakeholders to the table; new boundaries will be need to be drawn to define the role of regulation; and, for the largest firms, the tectonic plates of globalisation will continue to push the need to operate across regulatory jurisdictions.
To cope with this self-perpetuating flux, governance models will need to be able to change and renew themselves continually, to the point of having an element of planned obsolescence. Neither large firms nor regulators are naturally comfortable in this space. Even small Regtech firms are likely to crave greater certainty as they grow and become more mature.
There will also need to be an accepted route to market, one that balances legitimate commercial interests – likely to relate only to a few at any one time - with those of the wider group.
However, just because the end destination remains obscure doesn’t mean we shouldn’t make a start. For firms, the financial and other benefits are too great. For regulators, it presents the opportunity to help guide developments in an area likely to transform their relationship with firms.
The feedback statement is fairly neutral on the subject but, for the reasons above, getting governance right is likely to be fundamental to any viable route ahead and it’s hard to believe it won’t be centre stage before too long.
We are publishing our response to the Call for Input on Digital Regulatory Reporting. In this Call for Input we invited views on a ‘proof of concept’ which could potentially make it easier for firms to meet their regulatory reporting requirements.