In its Digital Regulatory Reporting (DRR) project, the U.K. Financial Conduct Authority (FCA), in conjunction with the Bank of England, has invited financial institutions to explore ways to work smarter on these activities by delegating much of the hard work to technology. Success in the endeavour, as the FCA put it, “opens up the possibility of a model driven and machine readable regulatory environment that could transform and fundamentally change how the financial services industry understands, interprets and then reports regulatory information.”
Part of the project’s work program was a twoweek “TechSprint,” held in November 2017, that was intended to test the feasibility of fully automated regulatory reporting with straightthrough processing of regulatory submissions. Among the anticipated benefits, accruing to financial institutions and regulators alike, are
- greater accuracy in data submissions
- and reduced time, cost and overall effort in generating them.
The TechSprint demonstrated that DRR could be accomplished under such controlled testing conditions and provided a proof of concept. Since then the program has held an extended pilot, as well as industry-led roundtable discussions bringing industry experts together, to try to determine whether and how DRR could be scaled up and put into practice in the real world.
The chief aim of the roundtables is to go over issues – legal, technological and regulatory – that could facilitate or impede the introduction of DRR. Participants in the latest and final one, held in London in June and hosted by Wolters Kluwer, seemed intent on contemplating the limitations of the concept: attempting to identify what a system might be able to do by acknowledging what it most likely will not be able to do.
One thorny matter that was highlighted involves a potential conflict between DRR, which participants generally agreed would be most effective following hard and fast rules – ideally by using a standardized model encompassing many supervisory frameworks employed across multiple jurisdictions – and the principles-based supervisory architecture that has evolved since the global financial crisis. If a substantial portion of the reporting process is handed over to machines, will management judgment be forced to take a back seat in matters of risk management, compliance and overall governance? Put another way, how compatible would DRR be with postcrisis supervisory architecture if interpretation of regulations by bankers is deemed a feature of the latter and a bug of the former?