What is the future of financial services regulation?
The future of financial services regulation may not sound thrilling to many, but it is, of course, incredibly important to all those of us who operate in this space, and to businesses of all sizes as well as each and every one of us as consumers and citizens.
Regulating the new and constantly evolving manifestations of technological developments and applications in financial services is a huge task. Can we (as lawmakers) and regulators keep up with the pace of technological change and innovation?
This was a question being considered at the Financial Conduct Authority’s inaugural Data Innovation for Future of Regulation (DiFoR) Conference last month, at which I was delighted to speak. It was a pleasure to give my perspective as someone wrestling in Parliament with the Financial Services and Markets Bill which I have written about here at length.
It was also a great pleasure to be able to address a gathering of global regulators, so well attended that every continent was covered. The nature of technological innovation means that collaboration across borders is essential to ensure regulation is fit for purpose at the scale and pace needed and I applaud the FCA for taking the lead and convening this event.
As a longstanding advocate for the vast potential of emerging technologies, not least in financial services, I’m equally aware of the critical importance of getting the regulation right. How do we regulate to optimise the opportunities, encourage innovation, and keep the consumer safe?
This tension is being played out in all jurisdictions – I’ve written recently about debates in the US over concerns that ‘regulation by enforcement’ is ‘driving innovation overseas and endangering American competitiveness’ and here in the UK the Treasury Select Committee’s recommendation that consumer trading in unbacked crypto should be regulated as gambling has led to an amount of head scratching, if not dismay, from the fintech community. What would regulating crypto like gambling mean in practice? The financial services industry has a strong approach to consumer protection, and I am confident that if we can get the regulation right, we will be able to reap the benefits.
The Financial Services and Markets Bill is currently working its way through the House of Lords and began the Report Stage yesterday. This huge piece of legislation – the most significant financial services legislation in a generation – is the place where this will be done. The Bill will implement the Future Regulatory Framework review, establish a regime to regulate backed stablecoins, and protect access to cash.
The devil is always in the detail and whilst there is much to celebrate in the Bill, the fact that it adds a secondary ‘competitiveness’ objective for the regulator means there are important questions about regulator accountability. I am involved with colleagues in the Lords in efforts to strengthen Parliamentary scrutiny of the regulator. Wait, so who’s watching the watchdog? (cityam.ca)
The proposed legislation will also grant HM Treasury the authority to establish financial market infrastructure sandboxes. These sandboxes will serve as platforms for testing and implementing new digital technologies by temporarily exempting, modifying, or applying specific legislation for targeted purposes. This is an excellent way of taking the best lessons from the past as well a creating a context to safely design the future. I applaud this approach. I have also proposed additions to the bill that would require an AI officer, an ‘ethical use of AI’ reporting duty, Government consideration of digital ID, recommendations around our cash infrastructure and a review of access to digital payments.
In 2017 I wrote a report titled ‘Distributed Ledger Technology for public good: leadership, collaboration, and innovation.’ Six years later I am just as clear on the need for the Government to take a lead – and that the focus should be on the public good – and there is one significant legislative development that demonstrates just that. The Electronic Trade Document Bill is a technology neutral bill that will boost the development and application of blockchain tools and transform international trade. It is also an illustration of how we can legislate and regulate new digital technologies to bring the kind of clarity and security that will boost innovation and unleash potential.
The Law Commission was responsible for drafting this Electronic Trade Document Bill and is now working on proposals around digital assets as a distinct ‘data object’ class of property. Our common law in this country is a great advantage and I am hopeful that we can deploy it effectively. If we get the legislation and regulation right, we will suck in business.
Currently it looks like MiCA – the comprehensive legal framework for crypto and digital assets adopted by the EU – is the most advanced ‘regime’. It may not be perfect and has been criticised for being cumbersome and overregulated but combined with the DLT Pilot Regime – a scheme that enables participating entities to conditionally obtain an EU-wide temporary authorization to offer DLT-based trading facilities and settlement systems to both professional and retail clients in secondary markets – it is more likely, in the short term, to attract activity thanks to greater clarity and certainty about the regulatory environment.
‘Data innovation for the future of regulation’ highlights once again the huge challenge for regulators to adapt, adopt and make the most of the almost limitless opportunities of using the technologies as tools for their own work alongside the regulation of these tools as they disrupt traditional financial services.
There is a critical positive role for regulators and legislators alike. I was delighted to be invited to participate in the conference – bringing together not just the global community of regulators but bringing myself, as a legislator, into the room as well. It’s essential that we get to grips with the big questions and it’s great to see this international collaboration happening. I am heartened and hopeful for a positive future for regulation and indeed, for us all.