European Regulators’ View on Technology: Innovation, Caution and Tech-Activism

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Rumblings at industry roundtables indicate that financial regulators are setting their sights on technology; they are implementing new technology and expect those that they regulate do the same. With the ongoing raft of regulatory messages, guidance, rules and regulation, it can often be hard to establish what the regulators really want to see and what is pure industry speculation. With that in mind, the following is a look into the messaging from a handful of regulators across Europe to determine their true expecations.

UK’s FCA

The UK’s Financial Conduct Authority (FCA) has, quite openly, endorsed technology and put in place measures to substantiate its commitment. In March 2019, it appointed Nick Cook as its first ever director of innovation. Cook established early on that he was keen to ‘enable change’ and spoke about encouraging ‘tech-activism’—a positive engagement with technology within the industry.

In a speech at the 6th Central Bank Executive Summit, Cook said, ‘we have been vocal in our desire to see further innovation and progress’, and that it will continue to push forward with its pro-technology agenda. He added that these ‘will not be the only occasions or areas where we call out specific issues and problems to which we would like to see further innovation and progress.’1

One such area of technical transformation is regulatory reporting. Over the past few years, the FCA has been working toward a digital regulatory reporting platform. In its latest business plan for 2020/2021, the FCA noted that the coronavirus pandemic has, in fact, accelerated this work and the regulator aims to launch the platform sooner than anticipated. In a recent podcast with the Barefoot Innovation Group, interim CEO of the FCA Christopher Woolard acknowledged that the current cost of regulatory reporting is ‘huge’ and ‘can run into the billions.’ As such, the FCA is embracing regtech as ‘anything that eases that burden, but at the same time makes the actual regulation that sits behind it more efficient and more effective, I think those kinds of programs really matter’, he said.

While the message coming out of the FCA is positive with regard to technology, any tech-specific enforcement action from the UK regulator is yet to be seen. It is highly likely that while the FCA encourages the use of technology, it is not yet ready to make regulatory intelligence platforms an essential, enforceable part of the financial services rule book.

Germany’s BaFiN

Germany’s Federal Financial Supervisory Authority (BaFiN) appears to have a pragmatic yet proactive approach to technology that is calculated and thoughtful. BaFiN is not making bold statements or promises, but instead has an overarching goal and is taking measured steps toward that goal. By 2025, it will be one of the leading supervisory authorities worldwide in terms of managing progressive digitisation.

BaFiN has a digitalisation strategy that acknowledges its primary objective to safeguard the proper functioning, stability and integrity of Germany as a financial centre whilst being sympathetic to the times of ‘progressive digitalisation.’ As part of that strategy, BaFin has developed what it calls ‘hub-and-spoke architecture’ to identify financial technology innovations at an early stage and to formulate effective regulatory management therein.

Toward the end of last year, BaFiN’s president Felix Hufeld said in a speech that the regulator still has ‘one leg in the analogue world’ but is ‘already on the starting blocks’ with regard to digital transformation. Digital transformation is ‘sweeping over the industry like a storm—and is shaking up business models, companies and even entire markets—including supervision’, he added.2 Hufield acknowledged that ‘digital technology—and artificial intelligence in particular—is going to be playing a greater role when it comes to identifying and resisting violations of the rules.’ It seems BaFiN is well aware of the challenge it faces and is taking thoughtful steps toward tackling that challenge.

France’s Autorité des Marchés Financiers

France’s financial regulators have developed a reputation for being proactive and swift to take regulatory action. Thus, it is no wonder they have also been ahead of the game in terms of embracing technology. In 2016, France’s Autorité des Marchés Financiers (AMF) created a fintech, innovation and competitiveness division—a step that other regulators took years after. Moreover, they have been actively engaged in the fintech and regtech community by taking part in the Paris Fintech Forum and to engage with the industry about financial innovation.

In a statement in October 2019, AMF chairman Robert Ophèle acknowledged that the AMF would ‘rapidly adapt their regulatory stance to […] disruptive technologies in order both to suppress the regulatory barriers blocking their experimentation and to mitigate the new risks they triggered; in short, to facilitate their development in a secure regulatory framework.’3

Much like the FCA, any firm regulatory action coming out of the AMF with regard to technology is yet to be seen. As Ophèle points out, it seems premature to regulate strictly the use of artificial intelligence or machine learning, which remain at early stages of development in the EU.4 However, the regulator will continue to monitor developments within the technological sphere to keep abreast of innovation and the risks that it presents.

Looking ahead

Technology, specifically regtech and suptech, is firmly on the agenda of global regulators. It is promising to see that regulators are embracing technology and still leaving room for firms to innovate and explore. As the AMF points out, new and smart technology is still in its evolutionary stage. Therefore, it appears that the regulators are willing to give firms some leeway in terms of their implementation strategies, what they are implementing and where. However, this will not last forever. It is likely that as the new wave of digitisation is normalised, and as tools such as artificial intelligence, machine learning and natural language processing (NLP) are refined, regulators will expect firms to step up the extent to which they are using them. Automation will be expected, not just encouraged. Firms should take heed and get ahead while they can.

Elliot Burgess, head of product, CUBE, London, UK

  1. “From Innovation Hub to Innovation Culture,” Financial Conduct Authority, 4 June 2019, https://www.fca.org.uk/news/speeches/innovation-hub-innovation-culture
  2. “The Future of Financial Supervision,” Federal Financial Supervisory Authority, 30 October, 2019 https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Reden/re_191021_Malta_P_en.html
  3. “Speech by Robert Ophèle, AMF Chairman – AFME European Compliance and Legal Forum – « Ai, Blockchain & Cryptoassets – Disruptive technology shaping the future of regulation & compliance » – 3 October 2019 in Paris,” Autorité des Marchés Financiers, 3 October 2019, https://www.amf-france.org/en/news-publications/public-statements/speech-robert-ophele-amf-chairman-afme-european-compliance-and-legal-forum-ai-blockchain
  4. Ibid.

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