Building a digital regulator: how the FCA is riding the innovation wave

Speech by Jessica Rusu, Chief Data, Information and Intelligence Officer, at the Innovation Finance Global Summit 2022.

Speaker: Jessica Rusu, Chief Data, Information and Intelligence Officer
Event: Innovation Finance Global Summit 2022
Delivered: 4 April 2022
Note: this is a drafted speech and may differ from the delivered version

Highlights

  • Technological innovation has changed our lives and how we interact with each other – the cycle of innovation has resulted in an explosion of data, which in turn has become a key driving force for financial innovation.
  • As a regulator we must foster innovation, be intelligence led and prepare for the future.
  • Our new unified firm support service ‘Innovation Pathways’ will play a key role in informing and ensuring our regulatory environment is fit for future innovation. 
  • Future CryptoSprint and APP Fraud TechSprints will help to support innovation while protecting consumers in a rapidly changing world.

This morning, we are celebrating a milestone. 49 years ago, on 3 April 1973, Motorola scientist Martin Cooper made the first mobile telephone call in history to Dr Joel Engel, then head of Bell Labs.

What started off as a brick-sized phone that weighed 2 kilos and took 10 hours to charge evolved to become an information and communication tool fundamental to modern life. 

The invention of the mobile phone has provided a platform for further innovations, including mobile commerce, apps, gaming, social media, image recognition, biometric scanners, and digital wallets. 

This technological innovation has changed our lives, how we interact with each other, and in the context of today’s summit, how consumers interact with financial services. This cycle of innovation has resulted in the exponential growth of data, which in turn has become a key driving force for FinTech and financial innovation. 

What is the role of innovation at the FCA? 

Technological innovation is a powerful force, with the ability to disrupt existing structures at speed and scale. The financial sector is no stranger to this phenomenon. 

My role is to build the digital regulatory future of the FCA whilst expanding and protecting the intelligence and data assets we hold.

I’m responsible for the Data, Technology, and Innovation division, where we develop and deploy digital intelligence tools to support the regulation of over 50,000 firms. 

The role of data and technology is increasingly pertinent as we’re faced with volatile geopolitical conditions, as can be seen with the crisis in Ukraine. In response to the UK financial sanctions against Russia, we have engaged with firms in sectors that are likely to be impacted, to set out our expectations in relation to compliance with financial sanctions obligations.

Against the backdrop of the ongoing pandemic and the climate crisis, the role of data, technology, and innovation in preparing for the future has never been more important. 

There are three themes at the centre of our work to ensure we can effectively carry out our role as a regulator:

  1. Fostering innovation – to create an enabling environment for innovation in financial services, while proactively scanning the horizon to get on the front foot of emerging issues. 
  2. Being intelligence-led – to leverage data science and advanced analytics to inform our decision-making and help us regulate at scale. 
  3. Preparing for the future – providing insights to ensure that our regulations are fit for purpose in a rapidly changing market.

How is the FCA fostering innovation? 

It is important that we keep pace with emerging technologies and carve a path for beneficial innovation that unlocks the opportunities that technology brings, while ensuring that consumers remain protected. 

The FCA’s Innovation services work with a mix of authorised and non-authorised firms, providing access to our Regulatory Sandbox and Direct Support and Advice unit. 

  • Our data shows that a high proportion of firms that use our Innovation services successfully become authorised – with 92% of firms who have used the Regulatory Sandbox and 98% of those that have used the Direct Support and Advice Unit.  
  • These services also support firms outside the regulatory perimeter. This provides us with additional insights into the technologies being used and their potential implications, to inform our future policy development.  

Today I am excited to share the launch of a new unified firm support service, 'Innovation Pathways', that combines and enhances our Direct Support and Advice Unit Services.

Innovation Pathways will provide bespoke regulatory support to firms with innovative business models that want to deliver positive innovations and consumer outcomes in the market. There will be a greater focus on sharing insights into our data and the support provided to firms.

Alongside our now ‘always open’ Regulatory Sandbox, Innovation Pathways will play a key role in informing and ensuring our regulatory environment is fit for future innovation. 

Kalifa Review

In response to recommendations from the Kalifa Review, we committed to establishing a regulatory ‘scalebox’ that supports firms focusing on scaling innovative technology.  Last year we piloted ‘Early Oversight’ and ‘High Growth Oversight’ initiatives. This extends supervision support to firms that are scaling at speed as well as those that are new to regulation, thus taking the recommendations further and covering both the start-up and scale-up stages. We are currently reviewing the findings of the pilots and will be announcing our next steps soon. 

Digital Sandbox 

Beyond our Regulatory Sandbox, we also offer a Digital Sandbox which supports start-ups and innovators in developing and validating new proofs of concept to genuine challenges facing the financial services industry. 

Synthetic Data

A key feature of the Digital Sandbox is that it leverages synthetic data. Financial data is highly sensitive and rightly subject to data privacy laws to protect consumers.  Therefore ‘Synthetic’ data is a privacy-preserving technique that expands the opportunities for data to be accessed and shared – a key building block for innovation.

Having observed the utility of synthetic data through our Digital Sandbox initiative, last week we published a Call for Input to gather views and assess the potential of synthetic data to further spur innovation in the market.

AI

The use of artificial intelligence (AI) is another force driving innovation in financial services. The FCA, together with the Bank of England, recently published the final report of the AI Public-Private Forum (AIPPF) to better understand how AI is changing UK financial markets and the challenges associated with its use.

We are also exploring the concepts of ethics and bias in algorithms and AI. As a practitioner, I know that there are analytical tools to explain black box models, and as a regulator, we want to ensure that all technologies – including AI – are used in a responsible way that avoids causing harm to consumers.

Being at the forefront of innovation is not only about supporting its development, but also harnessing its opportunities for our own work at the FCA, becoming an intelligence-led regulator.

How is the FCA being intelligence led? 

Data Strategy

The FCA Data Strategy is enabling the regulator to become more effective – harnessing data; converting it into actionable intelligence; and enhancing our understanding of what’s happening in real time, and crucially, of emerging risks.  

We have implemented a variety of techniques to swiftly identify and react to firm and market issues. 

We have built analytical tools that provide key indicators about firms to help identify risks – such as phoenixing – right at the gateway, which can then be addressed by frontline teams or through automated interventions. 

Last year, using new data and algorithms, we doubled the number of financial promotions amended or withdrawn compared to previous years. 

Furthermore, our new cloud-based technology infrastructure allows us to work with data at scale and speed. We can engineer, connect, and blend data to create new insights. This supports our work to monitor how markets and firms are functioning in line with our market integrity objective. 

DUIE

You will see us continuing to invest in technology, including the development of a Digital Unified Intelligence Environment (DUIE), to connect the vast array of data and intelligence we hold across our systems. 

This will deliver key actionable insights to our teams to decisively spot and stop harm. 

To put it simply, delivering the right data, at the right place, at the right time. 

How is the FCA preparing for the future? 

I’ve talked about Innovation and being Intelligence-led in our work. The third key ingredient in our transformation lies in the combination of Innovation and Intelligence to provide Insight into the future regulatory framework.  

To do this, we continuously strive to place technology and innovation at the heart of the FCA’s corporate priorities. 

For example, sustainable finance and environmental, social and governance (ESG) are a key FCA priority. Our latest Business Plan highlights our ambition to enable a sustainable financial future by supporting sustainable innovation.  

We recently introduced 3 new initiatives in this space – a Sustainability TechSprint, a Digital Sandbox Sustainability Cohort, and a Green FinTech Challenge. These initiatives fostered new solutions and encouraged the live testing of innovative products supporting sustainability. 

These initiatives also highlighted the importance of high-quality ESG data to generate insights and monitor how resilient markets are to the transition risks of climate change. This serves to ensure that the FCA leads the way in supporting behaviours and business models that will aid the transition to a net-zero economy.

In May, we will publish our Evaluation Report on the learnings from the Sustainability Cohort which will help shape the next stage of the digital sandbox concept. Meanwhile, the current data sets and Digital Sandbox environment will remain open and available to innovators who wish to use them to further develop products and solutions.  

APP fraud TechSprint and CryptoSprint

Another area of growing attention is the rapidly unfolding landscape of cryptoassets and their underlying distributed ledger technology.  

Our consumer research shows that over 2 million people in the UK are invested in cryptoassets.  

Our research also shows that younger investors are attracted to cryptoassets, and that social media hype and the gaming characteristic associated with crypto have contributed to the risk of harm to consumers in this space.

The UK has ambitions to become world-leading in developing a framework which fosters the benefits of distributed ledger technology while safeguarding the integrity of crypto markets and protection of consumers. 

In May, we will be hosting our first ever CryptoSprint, engaging with the industry to seek their ideas to inform our regulatory policy thinking. This will be the start of a programme of industry engagement as we work together to develop a dynamic framework that supports innovation while protecting consumers.

Alongside this, in September, we will be holding a joint TechSprint with the Payment Systems Regulator on Authorised Push Payment Fraud or APP Fraud, which increased dramatically during the pandemic – to paint a picture, nearly half a billion pounds were lost to fraud in 2020 alone. The TechSprint will be focused on exploring solutions to identify and prevent Authorised Push Payment Fraud, for example through identification of suspicious social media advertising and scam promotions. 

The world is changing rapidly. These initiatives demonstrate our focus on being proactive, and leveraging innovation to inform our future strategies.  

Being a more innovative and assertive regulator

The UK financial services sector needs its regulator to be proactive and lead from the front.

The FCA vision is to be even more innovative, led by data and technology. Ever more assertive to ensure consumer protection and market integrity. And ever more adaptive to ensure that regulation supports the FinTech community. 

Innovation serves as the golden thread that ties these qualities together. 

We welcome your continued collaboration as we drive forward a pro-innovation approach to regulating financial services.