How the UK is investing in the future of regulatory compliance

In the last decade, successive failures to manage risk have undermined trust in markets and prompted a drastic reassessment of the effectiveness of financial regulators.

The global financial crisis, followed by the Libor scandal and the associated manipulations of the forex markets, have highlighted the need for more effective safeguards against systemic risk. Now, UK regulators are exploring more collaborative approaches for drafting regulations.

When handling the books of major financial service providers, the subject matter can often be deeply obscure, even for the most experienced bookkeepers and accountants. For regulators the task is even more challenging. Not only must they audit some of the largest, most sophisticated finance firms in the world, but they also must fully comprehend how several of these institutions interact across different markets. In order to come to grips with the growing complexity of the financial services sector, the Financial Conduct Authority (FCA) and the Bank of England (BoE) are each investing in redefining the future of compliance.

In October 2015, the FCA launched an innovation hub to promote the development of technologies that automate compliance processes for the finance industry. Startups that operate within the hub are invited to trial new technologies within a closely supervised environment called a “regulatory sandbox”.

“When you’re a startup any regulation is a cost so it’s good to be able to have open dialogue with regulators,” says Marc Avedissian, co-founder of Tramonex, a cross-border payments platform that is participating in the regulatory sandbox. “It’s mutually beneficial because technologies like smart contracts and blockchains are not specifically covered by regulations. Working with us gives regulators the hands-on experience to start thinking seriously about how to draft compliance regulations for these tools.”

Having received a £250,000 funding grant from InnovateUK, Tramonex was one of the first companies to invited to the FCA’s regulatory sandbox when it opened. And, due to its close collaboration with regulators, it recently became the first company in the UK to be granted license to issue blockchain-based currency.

“The permission is linked directly to the sandbox. In order to run the tests that we do we needed to have a restricted license,” explains Avedissian. “This is a special license given specifically for the test environment. It means we are in a unique position to be able to offer digital services not governed by conventional regulations.”

Testing environments like this are gaining broader attention internationally. Hong Kong, Singapore, Abu Dhabi, Sydney and most recently Ottawa have followed London in establishing their own regulatory sandboxes.

This testing of new products, services, business models and delivery mechanisms within sandboxes is enabling regulatory bodies to remain agile in their drafting and understanding of compliance obligations. But while the FCA is looking for guidance, the BoE is more focused kickstarting innovation.

The BoE’s fintech accelerator programme assists startups in designing next generation software solutions for the financial services industry. Under the scheme, tech companies looking to disrupt the financial services industry receive both mentoring and seed funding.

MindBridge AI is a research technology firm that uses machine learning to mine complex financial data and assist forensic accountants in identifying fraud. Having initially started in Canada, MindBridge AI was attracted to the UK by the promise of close collaboration with the second oldest central bank in the world. Their next generation auditing software is already being put to work enhancing policymaker’s understanding of the impact of regulations on markets.

Many countries around the world are grappling with the implications of breakthroughs such as the blockchain and artificial intelligence. By creating the right incentives for companies like MindBridge AI and Tramonex, regulators are hoping to get ahead of the competition and maintain the UK’s status as global leader in financial services.

“You can draw parallels with the Internet in 1995. If someone had told you that you would be able to watch videos and do your shopping online they wouldn’t have believed you,” says Avedissian. “While the Internet has established itself as a great tool to transfer information, this new technology will become the new way to transfer value.”

There’s been much speculation and hype surrounding these types of technologies, but up until recently the lack of support from regulators and central banks has slowed their adoption. With the FCA and BoE investing both experience and finance in these developments, finance professionals can expect the UK to remain at the forefront of fintech innovation.

Jesse Onslow Norton is a writer, editor and communications consultant at Flibl. A former coder, his editorial work focuses on fintech, digital transformation, policy and regulation. His clients include corporations, governments, startups and SMEs from across the world. Follow him on Twitter @JesseOnslow.

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