An April shower of regulatory business plans…
On Monday 9th April, both the PRA and FCA published their 2018-19 business plans, giving us an insight into their policy and supervisory priorities for the next twelve months. Three key themes emerged from both of the UK financial regulators work programmes – Brexit, unsurprisingly, a focus on operational resilience and the ongoing innovations in FinTech and RegTech. In addition, the PRA emphasised that the post-crisis regulatory reforms were now complete and the focus will shift to implementation and evaluation, keeping up levels of supervisory scrutiny to ‘defend the post-crisis architecture’. Similarly, the FCA business plan did not contain any major policy overhauls, though several product or market areas will be examined more closely in the coming year.
Majoring on Brexit, the FCA explained that due to the level of resource necessary to support the UK’s withdrawal from the EU (an additional £16m), the items included in the 2018/19 Business Plan had been considered and prioritised very carefully. The PRA has also reallocated resources from what it deems ‘lower risk supervisory activities’ to focus on Brexit. The UK regulators’ involvement falls into the same three categories:
- Providing technical assistance and input to the Government with respect to its negotiations with the EU
- Working with international financial firms to ensure the process of post-Brexit authorisation is as smooth as possible, including the implementing the legislation on the temporary permissions regime if this is necessary.
- Making sure the PRA and FCA handbooks are ‘coherent and operable’ so that the UK regulatory system remains robust when the UK leaves the EU at the end of the transition period in 2020
Acknowledging the increasing prominence of new technologies, and new market entrants using novel technologies, both the FCA and the PRA have put operational resilience high on their agendas for 2018/9 and will be publishing a joint paper on this topic. However, the work both organizations intend to carry out in this area differ slightly, as we would expect based on their different statutory objectives.
- The FCA will focus on cyber-risk and system outages that could cause major disruption to consumers and to the effective functioning of the financial markets. Their work programme includes strengthening supervisory reviews of high impact firms’ use of technology, resilience to cyber-attacks and how ‘governance, systems architecture, risk management and culture contribute to data security’. There will also be greater scrutiny of outsourcing and third-party providers, particularly those that have a large concentration of financial services customers.
- The PRA is more concerned with the systemic impacts of operational failures and therefore will be working to identify ‘firms where an operational failure could have a significant effect on the real economy’.
FinTech & RegTech
Innovation in UK financial services is still proceeding at pace and both regulators recognised the benefits that these new technologies can provide to consumers, investors, market participants and even the regulators themselves. For the PRA and the FCA, though, there are also risks associated with this novelty and progress. The FCA, with its focus on consumer vulnerability and fairness, warns that fast-moving technological developments could result in disadvantaging the more vulnerable members of society and will require firms to develop plans to mitigate this risk to vulnerable customers. The PRA, meanwhile, is concerned with the potential for FinTech to alter existing business models and operating practices which may introduce unforeseen systemic risks.
The FCA’s focus on FinTech and RegTech for 2018/9 includes:
- The continuation of FCA Innovate and the regulatory sandbox, which it is hoping to extend to be a global ‘safe space’ for testing innovative cross-border solutions
- FCA participation in the Crypto Assets Task Force, along with HM Treasury and the Bank of England, which will issue a Discussion Paper towards the end of 2018
- Further exploration of the use of RegTech solutions by the FCA such as the use of machine learning to automate manual supervisory tasks
The PRA’s Business Plan mentions the following initiatives relating to FinTech and RegTech:
- The PRA will continue to monitor developments in financial technologies and will consider ‘whether and when any reassessment of regulation is required’
- The New Bank Start-Up Unit will continue in operation, and the PRA anticipates the authorisation of 20-30 new banks over the next three years
- As part of its IT strategy, the PRA will be undertaking work to assess whether machine learning technologies could improve the efficiency of its operating procedures