Update on UK’s digital regulatory reporting project

The FCA is exploring a new approach to how it receives data from firms. It has now released feedback from the financial services industry on how it could automate regulatory reporting. All eyes are now on the outcome of a pilot which is developing a prototype reporting mechanism.

Background to the latest FCA update
As part of its Fintech Sector Strategy, the UK government announced that the regulators would run a pilot to evaluate whether the cost of regulatory compliance could be reduced by developing machine-readable rules. The pilot began in summer 2018. See our animation on the digital regulatory reporting project for more.

The FCA sought feedback on the idea from industry via a Call for Input and has now summarised the views it received in a Feedback Statement.

Positive feedback but with some diverging views
Based on the feedback that it received, the FCA has concluded that the financial services industry considers the idea of digital regulatory reporting worth investigating further.

The potential benefits highlighted by the FCA include improved efficiency, consistency, quality and speed of reporting.

However, concerns were raised about the feasibility and expense of implementing the project. There were also differing views on the approach that should be taken.

“We believe that a common data model would realise efficiencies in the current regulatory reporting process.”
FCA Feedback Statement, October 2018

Important legal questions outstanding

In our previous post on this project, we highlighted some of the legal challenges to making rules machine-readable. The FCA received concerns about, for example, liability, rule accuracy and data security.

In response the FCA has said that a move towards automated reporting should not fundamentally change firms’ legal responsibilities or their relationship with the FCA. However, the question of legal responsibility “would need to be further explored”, perhaps in a future consultation on the project.

The FCA also says that the technology being explored in the pilot, such as distributed ledgers and smart contracts, could improve data privacy and security.

“The pilot has proved that regulatory code can be sent as a smart contract and distributed to a population of firms”
FCA Feedback Statement, October 2018

What digital regulatory reporting could look like
The FCA’s pilot is ongoing but the latest update hints at what we can expect to see for any future implementation of the project:
 
  • More collaboration: The FCA believes that continued collaboration with industry is fundamental but acknowledges that it may need to take the lead in some areas
  • Start small: Implementation would likely to start with existing, relatively non-complex requirements to demonstrate the real-world application of the project
  • Industry-funded: The FCA notes that upfront investment from firms will be required and should be shared appropriately across the industry
  • Blockchain focus: The pilot is testing distributed ledger technology and smart contracts for its prototype. The FCA also says that there is potential for natural language processing to help disambiguate rules
  • Open-source: The FCA aims for the outcome of the project to be an open platform on which additional proprietary solutions could be developed
“The capacity to call an API in a real-time environment is exciting from a regulatory standpoint however it opens up a number of issues for the firm in terms of capacity to review submissions before sending to the regulator.”

FCA Feedback Statement, October 2018

What happens next?
The FCA will publish the results of the pilot in early 2019.