The Financial Conduct Authority (FCA) has published its Business Plan for 2019/20, outlining key priorities for the coming year, including a focus on enhancing the use of technology and data.
The UK’s regulator also set out its research agenda for the next 12 months, which included artificial intelligence (AI), quantum computing, distributed ledger technology (DLT) and regulatory technology (RegTech).
The document stated that AI and big data are transforming the financial industry, with firms applying them across the value chain, from personalised products and pricing, to detecting fraud, managing risk and regulatory compliance.
“We need to understand how these developments are shifting market economics, the resulting benefits and harms and implications for regulation,” it read. “We also need to continue to capture new opportunities to use big data and advanced analytics as a regulator – the possibilities to harness AI to better understand markets, design effective regulation, and operate more efficiently are growing.”
The FCA stated that AI increasingly affects the demand and supply of financial services, which could alter competitive outcomes and have consequences for which consumers can access services.
“Firms’ use of big data and algorithmic approaches can also raise ethical issues such as concerns about algorithmic bias, the ‘explainability’ of decisions made on the basis of `black box’ algorithms and data privacy,” the document explained. “While there is a growing body of research addressing these and other relevant issues, there is a need for further work to investigate issues in financial markets and present strategies for reducing potential harm.”
Big data and AI may also enable regulators to better understand the impact of policies and design more appropriate interventions. “Two particularly promising areas that we would like to explore further are: using machine learning to predict outcomes before they happen such as credit default or financial distress, and using machine learning to help policy design through causal estimation, including being able to estimate how the impact of policies varies across individuals.”
DLT and its implementation as blockchains has received widespread attention and significant adoption in recent years - from smart contracts to crypto-trading - with research required to identify the technology’s potential benefits and risks, which will shape regulatory interventions.
“Benefits may include improved access to banking services, faster and cheaper payments and less systemic risk from reduced time to settling financial instruments,” the regulator stated. “Potential risks could include the anonymity of transactions making them a vehicle for financial crime, and the implications of quantum computing for DLT security.”
Quantum computing meanwhile, has the potential to disrupt financial services profoundly in the longer term, with implications for resilience and encryption across all financial markets.
“Although developments are still new, we are interested in research that strengthens our understanding of the potential consequences for consumer protection, market integrity and financial stability,” noted the FCA.
The watchdog explained that there are “enormous opportunities” for regulators to operate more effectively and efficiently through new technologies, data science and machine learning.
“Some of our current interests include insights and methods for automation and more consistent application of what are now manual processes, including via machine-readable regulation, creating more accurate risk models to help prioritise our regulatory efforts, gain real-time and near-real-time insights into firm behaviour and market outcomes, and allow us to intervene earlier and greater visibility of firms and markets operating around the perimeter of what we do and don’t regulate.”
In terms of cyber security, the regulator promised to use its tools to test the cyber capabilities of ‘high impact' firms. Its CBEST ethical hacking programme, in partnership with the Prudential Regulation Authority, gives insight into core areas of firms’ cyber resilience and will be rolled out to a larger number of firms this year.
There are also plans to undertake further work to better understand firms’ weaknesses in identifying their key assets, detecting cyber-attacks on these assets and how they can improve resilience.
“Our analysis shows cyber attack was a significant cause of incidents, totalling 14 per cent of all reported incidents between October 2017 and September 2018,” read the Business Plan, adding that findings and feedback will be given on these areas by the fourth quarter this year.
“We will also consider whether co-ordinated action on system resilience and effective prevention of financial crime and fraud in retail banking is necessary, in line with the findings of our Strategic Review of Retail Banking Business Models,” the statement read, noting that collaboration is underway with the government as part of the broader economic crime agenda to ensure alignment between cyber resilience and financial crime work.
“We are also strengthening our ability to use technology to target criminals – we will use more advanced data analytics and machine learning techniques against money launderers and other financial criminals.”
FCA chief executive Andrew Bailey commented: “Dealing with Brexit will be the most immediate challenge we face, but this plan also commits us to a stretching programme of work across the financial sector.
“In order to ensure we are a regulator that continues to serve the public interest, we need to adapt to the ever-changing environment,” he continued, adding: “This is why the future of regulation is a key priority in this year’s Business Plan.”
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