Since the UK’s departure from the European Union (EU), there has been a surge in regulatory and policy announcements that promise to change the UK financial services industry. Key among the announcements are HM Treasury’s Financial Services Regulatory Framework Review (FSRFR) consultation, the Financial Services Bill 2019-2021, the PRA’s Consultation Paper on the Basel standards (CP 5/21), and the Global Talent Visa. Combined, these regulatory and policy announcements represent a shift towards technology in the financial services industry. The changes present financial institutions with a unique opportunity to transform the UK financial services industry to become a world leader in financial and regulatory technology. As a key player in the RegTech space, Suade has been closely following the changes to support clients through the process of digitalising finance.
Financial Services Regulatory Framework Review and the Financial Services Bill 2019-2021
As part of the FSRFR, HM Treasury published a consultation which proposed to take the UK regulatory system back to the model of the Financial Services and Markets Act (FSMA) 2000. Under FSMA, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) develop and introduce rules within their statutory remits, guided by their statutory objectives. In recent decades, competence in the space of financial services regulation slowly but surely moved towards EU institutions. The FSMA model had, thus, largely become obsolete. With the UK’s departure from the EU, the model represents an opportunity for the UK’s financial regulators to reinvent themselves and shape the direction of financial regulation. An important factor in this is the Financial Services Bill 2019-2021 which interestingly requires the PRA to consider the UK’s international standing when implementing the Basel standards. The PRA’s consultation paper (CP 5/21) on the Basel standards indicates why this policy development could have potentially significant consequences for the UK’s financial services sector.
CP 5/21: Implementing the Basel standards in the UK
Here, the PRA takes its first step towards implementing its own unique interpretation of the Basel standards for the purposes of UK financial markets. The most significant development appears to be the PRA’s focus on proportionality. Combined with the objective of stability and soundness set out in FSMA, this regulatory direction is particularly important to the UK government’s plans to boost the FinTech sector. Proportional stability and soundness ensure that smaller institutions are not unduly burdened to avoid impeding their operations. Driving the growth of the FinTech sector will allow the UK financial services industry to consolidate its expertise in financial technology and become a world leader in the space.
Proportional stability and soundness
The PRA’s proposals achieve an interesting balance between the regulator’s statutory objective of stability and soundness on the one hand and proportionality on the other. The introduction of Basel III and other BCBS standards changed the financial services sector in many ways. The net stable funding ratio introduced a means of providing long-term funding stability, while the liquidity coverage ratio created a standard for short-term liquidity. The large exposures measure sought to address concentration risk, while the market risk provisions in the fundamental review of the trading book were designed to deal with exposures to market fluctuations. The standardised approach to counterparty credit risk introduced a new standard for calculating exposure risks in derivatives transactions, whilst the BCBS strengthened capital at financial institutions by shifting the focus towards common equity tier 1 capital. Implementing these standards is essential to ensuring the stability and soundness of UK financial institutions. At the same time, however, Basel III significantly increased the regulatory burden for regulated entities. This frequently has a particularly significant effect on smaller institutions that lack the resources to implement large programmes for regulatory change.
It follows that the PRA’s focus on proportionality is highly commendable, especially given the importance of the UK’s growing FinTech sector. The low thresholds for the proportionality measures suggest that the PRA is careful to strike an effective balance between proportionality and its statutory objective of stability and soundness. FinTechs should be able to capitalise on this opportunity to grow their businesses in a stable environment without undue regulatory burden. The Global Talent Visa scheme further solidifies the support for FinTechs, whilst also providing larger, established institutions with the tools to upskill their FinTech departments.
Global Talent Visa: FinTech skills
In February 2021, the UK government announced plans to develop a visa scheme for digital technology leaders called the Global Talent Visa. The visa scheme is designed to encourage employees, self-employed individuals, and entrepreneurs from around the world to bring their unique digital technology skills to the UK. Among these coveted skills are expertise in FinTech. The UK’s post-Brexit points-based immigration system sets out a list of requirements which, if ticked, gives applicants for a visa a point towards their visa application. The Global Talent Visa will consider FinTech skills a point in favour of granting a work permit. Giving FinTechs and established financial institutions the tools to draw on a global workforce to hire the required talent is an important enabler of the UK’s ambitions to become a world leader in financial technology. However, these ambitions cannot be realised without an effective combination of the PRA’s Basel III measures discussed above and regulatory technology designed to minimise the regulatory burden on financial institutions. The RegTech sector offers powerful technology solutions that mitigate the regulatory burden for financial institutions. The FSRFR and other public sector projects show some promising advancements in the use of regulatory technology or RegTech.
Transforming Data Collection
Throughout the FSRFR, HM Treasury encourages UK financial services regulators to look to technological advancements to reduce the regulatory burden. One such project is the Bank of England’s work on transforming data collection, which is designed to improve regulatory reporting processes. This falls alongside the FCA’s Digital Regulatory Reporting (DRR) initiative that Suade contributed to and discussed with the Bank. The findings of both projects are of importance to the whole financial services industry.
In 2020, the Bank of England launched a consultation to look into transforming data collection in the financial services sector. The project was designed to identify technological advancements that could improve regulatory reporting processes to lower the regulatory burden for financial institutions. In March 2021, the Bank published its findings from the initial consultation and subsequent interviews with different stakeholders in the financial services industry. The findings promise to usher in an era of technological solutions for regulatory reporting challenges that should lower the regulatory burden and lead to operational efficiencies. For the key findings, please read Suade’s summary here.
How Suade can help
As a key player in the RegTech space, Suade is at the heart of these regulatory and policy developments. Suade helps its clients navigate the regulatory landscape and provides technological solutions to regulatory problems. As the PRA charts its own path, some deviations from the EU’s established approach are inevitable. Thanks to Suade’s intuitively designed RegTech solution, the regulatory burden for larger institutions dealing with divergences between the UK and EU regulatory systems is minimal. At the same time, FinTechs and other smaller institutions can benefit from deploying the Suade solution, as its machine learning technology guarantees that requirements are covered. Suade is already at the forefront of the technological developments discussed in the Bank of England’s project ‘transforming data collection’. Finally, Suade is excited to hear about the plans for the Global Talent Visa and is looking forward to making the most of a global talent pool.
See how Suade can help your institution deal with the new regulatory and policy challenges! Book a demo here.