Can financial regulation in the UK keep up with the new wave of technological innovation?

By Stephen Everett, Digital PR Executive

Andrew Bailey, the FCA’s chief executive spoke last week of his “fears” that the city regulator would be left behind by technological innovations including blockchain and artificial intelligence. The comments came as the regulator released its new annual business plan. He wanted to stress the fact that without regulation in close harmony with technological advances, financial firms could be left vulnerable to making bad business decisions and, as a worst-case scenario, even go bust. Although I’d argue that two other joint worst-case scenarios are data breaches and mistreatment of personal and business customers, both of which remain significant compliance and regulator risks…

Image credit: Financial Times

A lack of appropriate regulation could potentially undermine the strength of London as a leading financial centre as funds and resources continue to be allocated to the cost of Brexit. “The more money we have to spend on Brexit, the less we have to spend on other areas“, he added. With the FCA set to spend an extra £22m on Brexit preparations, the effects on the organisation’s budget is clear to see, especially with further delays to Article 50 possibly pushing this figure higher. Therefore, finding the budget to keep up with the rapid pace of technological innovations will only become more challenging.

The traditional financial services firms are investing in technology such as AI to speed up decision-making, create efficiencies and improve customer experience. It’s also to keep up with the competition posed by specialist Fintech and Paytech start-ups, something my colleague John Broy recently blogged about in more detail. The commercial advantages are clear for these businesses, but Bailey stressed that changes in technology could bring risk to the operational resilience of our financial system. This poses the question of how accountable firms are for the effects of decisions taken by machines. It’s important to also consider the risk to consumers who could make ill-informed decisions without the adequate guidance that humans provide, compared to machine algorithms alone. This could potentially leave us all more exposed to financial scams and leave some of the less tech savvy generations struggling to participate in a technology-driven banking system.

One of the reasons that the FCA is concerned they won’t be able to keep up with the changes in technology is that they could struggle to acquire the skills and resources to match a changing landscape. There is no doubt technology will revolutionise the financial system in the next 10 years but at what rate and to what degree, no one can predict. It is essential that international financial regulators like the FCA continue to invest in resources but more importantly their people. Regulators must continuously upskill existing staff and create an attractive place for new people to join, as technology advances to make sure they can provide consumers and firms with the right advice and products.