The FCA has published a speech given by Martin Wheatley, (Chief Executive, FCA) entitled The technology challenge.
In his speech, Mr Wheatley focusses on the challenges and opportunities presented to firms by the advent of technological developments. He notes that the financial sector has a long history of promoting innovation but that over time this innovation has in itself developed along with the different types of problems it presents. The difference between then and now, Mr Wheatley points out, is that the pace, volume and origins of change have moved forward which in turn creates very different problems for financial services leaders.
Technological trends such as mobile payments, high frequency trading, money transfer, payments technology and peer to peer (P2P) finance have all exploded in the last few years. It is these interesting trends that have led to senior executives seeing technology as the fourth most serious “banana skin” threatening the future of their firms. Boards are ever more aware that they need to take account of the threats of cybercrime, data losses, runaway algorithms, flash crashes and hash-crashes to their technological innovation plans. Mr Wheatley reminds firms of their need to balance such threats with effective methods of oversight which are not overly intrusive nor obstructive into the way firms conduct their business, in order for firms to benefit.
The FCA is fully aware of the potential pitfalls that technological innovation presents and in this vein, launched Project Innovate. The key objective of this project is to improve the lives of consumers or clients using technology that supports the regulatory environment. The project has various work streams such as investigating mobile banking, P2P, online investment, wearable tech, big data and next gen data processing using measures such as, firms along with the FCA, having more direct interaction with consumers. To this end, the FCA is working closer than ever before with financial services firms who are developing innovative approaches to services that are not explicitly covered by regulatory rules or, where for the moment, they appear ambivalent. Currently, the FCA offers support in the form of compliance expertise, an incubator to support innovative business for authorisation and by looking for areas within the system that need to adapt to new technology.
Mr Wheatley also questions the risk and benefit equation of technological innovation focusing on high frequency trading (HFT) and P2P as two key concerns. With both HFT and P2P, the risks to mitigate are market fairness, market cleanliness and market resilience against the benefits of competition and market efficiency, liquidity from reductions in bid/offer spreads and reduced transaction costs. Any such developments must also be considered in line with the new MiFID II obligations. The common dilemma for both though is how to achieve equilibrium between supporting the benefits without creating unacceptable risk. This is something that each firm must consider based on its own individual circumstances and future commercial intentions.
Mr Wheatley also mentions that going forward, firms will need to give much thought on how to effectively tackle the threat of cybercrime. History shows that it will be impossible to predict which technological innovation will be next and what mitigation should be in place to be able to deal with this successfully. Irrespective of this, continuing technological advancement will always progress at a pace ahead of the current legislation in place at the time. However, the financial services industry will also continue to progress and it will simply be more a question of degree as to how far and fast this will happen. Ultimately though, it will still be the responsibility of regulatory bodies like the FCA to confront the challenges, take hold of the advantages in order to create a better future for the financial services industry and its customers.
View The technology challenge, 10 June 2014