Bank of England and FCA Look To Fintech04.29.2019
The Bank of England said some aspects of supervision are amenable to new technologies while the Financial Conduct Authority said its Innovate program has helped new financial services firms come to market more quickly.
Mark Carney, governor of the Bank of England, gave a keynote speech at the Innovate Finance Global Summit in London this morning.
Our Governor Mark Carney opened UK Fintech Week this morning. He spoke about the opportunities created by financial innovation. And he set out how we’re embracing these changes. #IFGS2019https://t.co/hb1CBCUNKO pic.twitter.com/7tijfZEZ9m
— Bank of England (@bankofengland) April 29, 2019
Carney said the UK central bank is building a platform for fintech innovation as advanced analytics such as artificial intelligence can increase the resilience of the financial system.
The increasing amount of data being created brings opportunities to serve customers better and to manage risks more effectively. As a result, the banking industry has become the second biggest global spender on AI systems. Carney continued that the sector is expected to invest a further $10bn (€8.9bn) by 2020 as AI-enabled solutions are becoming more important in fraud detection, automated threat intelligence and prevention.
“As some in the audience are exploring, there is also significant potential in credit assessments, wholesale loan underwriting and trading,” he added. “As my colleague James Proudman recently described, such advanced analytics are also likely to lead to changes to the way the Bank conducts supervision.”
Carney continued that rule-setting and reporting; analysis and monitoring; and setting and communicating a supervisory strategy to mitigate identified risks are all amenable to automation, machine learning or AI. For example, the Prudential Regulation Authority at the Bank of England has a rule book with more than 638,000 words, which is longer than the novel War and Peace.
“It is also somewhat less interesting and infinitely more complex,” said Carney. “We are currently using advanced analytics to understand the complexity and interconnectedness of the PRA rulebook, to identify ways to simplify our rules, and to make compliance with them easier for firms.”
The central bank is also running a pilot for digital regulatory reporting with the UK Financial Conduct Authority on machine readable reporting requirements that firms’ systems could interpret to automate regulatory data collection.
“These initiatives are goods in and of themselves, but they also create the potential to unlock the power of AI in order to improve the quality of our supervision,” added Carney.
Alex Dorfmann, senior product manager for financial information at Switzerland’s SIX, said in an email to Markets Media that Carney is right to highlight how data can be used to reduce the compliance burden but this will not happen overnight. He explained that the data that banks use is constantly changing.
“Before working out how to best use these new data sources, financial institutions need to first come up with a plan to achieve sustainable long-term compliance with existing information,” added Dorfmann. “It is no good continuing to add to the vast array of information, every time a new rule is enforced. After all, regardless of the regulation in question, they all require overlapping sets of data.”
FCA’s innovation division
Christopher Woolard, executive director of strategy and competition at the FCA also gave a speech at the Innovate Finance Global Summit today.
The FCA launched its Innovate project with two people in 2014 and now has have a fully formed innovation division. The regulator published an evaluation report of the project today and Woolard said that firms that have gone through the Innovate programme have come to market 40% faster than equivalent financial services firms.
“That equates to shaving three months from testing to roll out,” Woolard added. “Nearly 700 firms have received some kind of assistance from our innovation work.”
— FCA (@TheFCA) April 29, 2019
He continued that 47 firms that have completed sandbox testing at the FCA and around 80% are operating in the market with the necessary authorisation, and a further 63 are in the pipeline. In addition, almost half of the 44 start-ups that tested in the first three sandbox cohorts either received additional investment or were acquired during or after their test.
Woolard said the regulator is also launching the first cross-border tests of the Global Financial Innovation Network (GFIN), a group of regulators working together to test new propositions across borders. GFIN had 12 founding members and has grown to 29.
“Today we’re adding another six, with the addition of colleagues from markets like Brazil – taking the total to 35,” said Woolard. “I’m delighted that today we’re also announcing the first eight firms being considered for cross-border testing through the GFIN network.”
Onfido, Tradle, Ascent RegTech and Starling Trust are testing with the FCA alongside other jurisdictions.
Woolard added: “These are propositions that are not just tinkering around the edges of the status quo, but have the potential to fundamentally change how things are done. Truly global challenges require a global response and GFIN lets us test whether this can become reality.”
The FCA will also announce the firms who will run tests as part of its Green FinTech Challenge and is investing time and resource to use more innovation in-house.
“Financial crime is staggeringly costly – to financial services and society at large,” he added. “But new technologies offer the potential to tackle this threat and seriously curtail the ability of criminals to take advantage of our financial system.”
Last year the UK regulator held its first TechSprint on financial crime which had 260 participants from 16 countries. In July the FCA will be holding a follow-up session to explore how technology can be employed to break down international barriers.
“This will be a truly global effort, with international colleagues from US, Europe, Africa, Asia and the Pacific working together,” said Woolard. “Our aim is to prompt solutions that will go on to be tested in the real world through the Sandbox and GFIN.”
A better institutional platform for custody and fund administration will expand the digital asset market.
Investors lack confidence in fixed income data and believe only half is really reliable.
Kaiko will use the funding to strengthen its institutional data products and infrastructure.
The consortium is creating the first open market electronic trading platform for syndicated loans and CLOs.
The collaboration achieved a 76% reduction in email traffic for operational processes for trades.