The UK FCA could become the world’s first AI robo-regulator

A little while ago I wrote an article highlighting a point made by the UK’s Chancellor Philip Hammond that clearly stated the UK government was interested in creating the world’s first Robo-regulator for fintechs – a way to automatically monitor and ensure compliance without the need for any human input or immediate oversight. And now, speaking at the Personal Investment Management & Financial Advice Association (PIMFA) summit, acting director of strategy at the UK Financial Conduct Authority (FCA) Richard Monks explained in more detail how technology was set to change the regulator's approach to supervision and enforcement of the UK financial services industry.

Specifically, Monks said technological advancements were informing how the FCA tackles "the challenge of the very small number of firms who, deliberately or not, cause issues and have a disproportionate impact on trust in the [financial] market, creating costs for the industry and for consumers".

In a concept reminiscent of Steven Spielberg's 2002 sci-fi thriller Minority Report, he also said the FCA was looking to use Artificial Intelligence (AI) and machine learning to try to predict which firms or individuals are likely to commit financial crimes.

"This could be based on a range of data, including publicly available data, complaints data and past records of approved persons or controllers. Some of our initial trials suggest that if we invest in big data in this way, it could have a material impact in identifying those most likely to mis-sell," said Monks.

“In the shorter term,” said Monks, “technological advancements are close to allowing the FCA to reduce compliance costs for regulated firms and boost the quality of data the regulator receives.”

He also said the capacity for automated transaction reporting - whereby the FCA is automatically notified when a transaction is made "will significantly reduce the cost of regulatory reporting" and "enable [the FCA] to focus on high-risk investments and those firms most likely to mis-sell."

"My final science fiction point - can we make the handbook machine-readable?” he said, referring to being able to digitise the FCA’s regulatory rule book which is key step that would need to happen if the FCA was to stand a chance of automating regulation. "This could see our rules automatically inputted into [banks] systems and business processes - all but eliminating compliance costs. It is certainly feasible.

"Longer term this could result in automated regulatory responses - some form of robo-regulator," he added.

Regulation is one of the biggest burdens most industries face, especially the heavily regulated financial services industry, and the move to create a robo-regulator could not only help companies ensure compliance and dramatically reduce costs, it could create a domino effect that sees robo-regulators across other industries become the norm, not the exception.