US & UK cooperation for regulation “vital”

In a week in which the UK Treasury published far-reaching, post-Brexit legislation for UK financial services, FCA Chief Executive Nikhil Rathi has spoken in the US about the power of cooperation for regulation.

In a speech entitled “How the UK will regulate the future”, Rathi takes stock of the current regulatory topics that are being hurriedly discussed across the industry, and notes that “intensive dialogue between our nations is essential” to ensure consistent outcomes are delivered.

Since the UK left the EU, there has been a growing move towards localised legislation. The rhetoric of “taking back control” has materialised in changes to well-rooted legislation – from Solvency II to the Financial Services and Markets Act. From the beginning, the FCA has optimistically viewed Brexit as a “springboard” from which to take stock of current regulation and dive head-first into innovation. As Rathi notes, “having departed from the EU, we now have a vital opportunity to adapt our regulatory system” and, in doing so, he is reaching across to the US to play a part in that adaptation.

Pressing issues requiring a global response

Rathi outlines that many of the issues that the regulator is currently looking to tackle “require international responses”. These issues include:

• Cryptocurrency
• Environmental, social and governance factors (ESG)
• Diversity and inclusion
• Consumer duty

Interestingly, many of these issues were raised in a speech by the PRA’s Nathanael Benjamin to UK Finance in the same week. They are also issues that hold a common thread – they are issues that transcend borders. Cryptocurrency, for instance, is a decentralised finance operating in traditionally centralised financial and regulatory markets. ESG, in particular climate change, is not something that stops at state or country lines. Diversity and inclusion, again, is a worldwide, systemic issue.

And so, there is a clear logic to why the FCA is eager to work internationally to solve emerging trends insofar as they are international trends.  

A new regulator rises from the ashes

In his speech, delivered to the Peterson Institute for International Economics, Rathi reflects on the 2008 global crash, specifically how “central bank governors and regulators came together facing what was then described as the greatest global economic threat of our times”.

Looking ahead, he adds that while we should not forget the lessons of the past there is now a need for a “different type of regulator”. This “new” regulator emerges from the ashes of regulators past as a new, innovative, data-centric regulator – one whose action is rooted in technology and analysis.

Rathi lists the lengths that the FCA has gone to to adapt to the ever-changing environment. It has invested in data and technology platforms, moved core systems to the cloud, now uses data analytics tools to speed up its case management processes – as well as rolling out new analytics screening tools to ensure firms are “implementing robust controls to comply with sanctions effectively”. It is also using automation to scan for fraud and scams. The FCA is, in essence, fighting tech with tech.

The FCA can’t do it alone

For the first time in its long history, the FCA notes that the current calls from within the industry are for more regulation. “In the past, innovative firms would have been pleading for less regulation. Now they understand and appreciate that rules are there to help provide certainty”, he adds.

However, developing a regulatory framework for new and emerging innovation and risks is not something that the FCA – or any regulator – can do alone. Rathi is looking to the US for “regulatory engagement” which is “critical”. Combined, the US and the UK are responsible for the supervision of 11 of the 30 largest banks in the world.

The US and the UK also, according to Rathi, have “the same shared values and desire to have free and safe markets, well regulated”. With this in mind, “intensive dialogue is hugely valuable to help ensure we deliver consistent outcomes and common goals”.

The US and UK have recently agreed to innovate together for crypto-asset regulation as part of the US-UK Financial Innovation Partnership, as well as collaborating on other initiatives with the IOSCO for decentralised finance. Looking ahead, Rathi adds that it is “vital that regulators “collaborate to regulate”.

CUBE comment

As our latest Industry Data Report, Cryptopia: Crypto and Regulation on a Cliff Edge, highlighted, it is essential that regulators collaborate for crypto to avoid a fragmented patchwork of global obligations. Lack of harmonisation will inevitably see hundreds, if not thousands, of regulatory issuances – all saying slightly different things, in slightly different formats. Instead of clarifying the regulatory landscape, this only serves to muddy the water.

With this in mind, Nikhil Rathi’s speech will be a welcome message to compliance teams. Collaboration across borders isn’t just essential for crypto, after all. As financial services become digital and increasingly global, regulators will need to work together to level the playing field, avoid regulatory arbitrage, and prevent a deluge of new work for the compliance team.

A point to note – and a running theme across regulatory collaboration – is that regulators frequently talk of their desire to work together on topics, yet we seldom see genuine regulatory harmonisation. In fact, recent government action post-Brexit currently serves more to disconnect regulation than connect it. There is some merit to UK regulation for UK companies, but for global compliance teams this can amount to a painful exercise in piecing together puzzles. Fingers crossed the emerging move towards addressing global financial issues will, in turn, inspire a move towards genuine, collaborative regulatory approaches.

If you’re struggling to piece together the fragmented landscape of regulatory change, speak to CUBE.