Digital shift comes at a price

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Digital shift comes at a price

This should be welcomed; however, any changes to the system need to provide tangible benefits to the thousands of small companies that use it, as well as large ones and the regulator itself.  

In a recent speech, Christopher Woolard, the executive director of strategy and competition at the FCA, neatly summed up the overall objectives when he said: “We want to explore not only how technology can drive new products, services and firms in consumers’ interests, but also what it can do to reduce the compliance burden of existing ones and make them more effective.”

The changes to Gabriel are just one part of the FCA’s increasing focus on technology to deliver improvements throughout the financial services industry.

Key Points

  • The FCA has announced it will be be looking at replacing the Gabriel reporting system
  • A digital solution could allow the FCA to pull regulatory information from advisers’ databases
  • The costs for small companies of the new system could be extensive 

For example, the FCA is hoping to use artificial intelligence as part of its supervisory activities, including the automated monitoring of patterns of transactions that may be suspicious. 

Clearly, these changes and the efficiencies they will deliver are also designed to save significant costs for both the FCA and the bodies it regulates.

The end game is that DRR could allow the FCA to pull regulatory reporting data directly from companies’ databases

Focusing on the changes to regulatory reporting, the FCA set up a pilot in 2018 involving a handful of the largest banks and investment bodies to explore how companies and regulators could use technology to make regulatory reporting more accurate, efficient and consistent.

The second phase of the pilot is now under way, with a focus on the types of regulatory reports that may be suitable for a digital regulatory reporting (DRR) solution.  

In essence, the end game is that DRR could allow the FCA to pull regulatory reporting data directly from companies’ databases.

This would remove the need for companies to interpret regulation to understand what data needs to be gathered; which often leads to inconsistent interpretation by companies and incomparable data.    

While this project is still in its infancy, the FCA’s recent request for comments on Gabriel is one of the first formal opportunities that smaller companies will have had to give feedback and ideas on how regulatory reporting could be changed for the better.

However, we need to bear in mind that the feedback the FCA is requesting relates to the usability and functionality of the system rather than the scope of information requested.

More information wanted

The FCA has made it clear that, in an ever-developing regulatory environment, the amount of information that it needs to gather is likely to increase rather than reduce and the information they gather now is necessary to confirm compliance with regulation.

For most small companies, the Retail Mediation Activities Return is the main supervisory tool the FCA uses to ensure that key requirements are being met.

A wider debate on the relevance of the data that is requested is not on the agenda here – at least in the current phase of the project.

Bankhall has helped advice companies to complete their regulatory returns on Gabriel ever since the system was introduced well over a decade ago, so it regularly hears about common issues raised by companies regarding the system.

Navigation and on-screen instructions have been sources of frustration for companies over the years.

Another common issue is timing out, as well as system downtimes, particularly during busy periods.

In relation to time-outs, companies may be close to completing a section when - without warning – the page will time out and the submission data will be lost.

The FCA is clearly aware of these and other common issues, as the survey lists a number of problems that may sound familiar to advice companies, including those around accessing, viewing, notifications and reminders, and submission.

Clearly, any improvements to these should help to reduce the time spent in completing returns.

Small companies, high costs

However, perhaps the more interesting debate is yet to come. Namely, how the DRR pilots will deliver benefits for smaller companies.

It is clear from the pilot work conducted so far that some investment will be needed by both the FCA and the companies it regulates before DRR becomes a reality.

The cost and time savings of being able to extract reporting information directly from a company’s databases are clear, but the costs and benefits of reaching this solution are not, especially for smaller companies.

While the first stage of the pilot was considered to be a success, it was notable that its participants were large banks and investment companies with significant reporting obligations.

The ability of these companies to absorb potentially significant costs and time resources in the short term to facilitate benefits in the longer term is arguably greater than the ability of smaller companies to do the same.

For smaller companies, it is not yet clear whether the potential costs associated with DRR will outweigh the potential benefits.

In its October 2018 Digital Regulatory Reporting Feedback Statement Call for Input, the FCA stated: “We are conscious of understanding the potential benefits or otherwise for smaller companies, and have engaged with bodies such as the Smaller Business Practitioners Panel to gain a fuller insight.

“We will continue this consultation process as further developments, particularly the output of the pilot, become available.”

As yet, no further information has been issued on the benefits for smaller companies.

The FCA does, however, goon to state: “Our expectation and hope is that if we do pursue a DRR regime, then technology and software companies would look to develop utilities to satisfy the needs of a range of companies including smaller companies, for example, through the development of new reporting functionality within accounting software packages.”

This statement could be a cause for concern for some small companies.

While many do use back office/accountancy systems to support their regulatory activities, a significant number do not – and these systems come at a cost. A potential alternative is to develop internal systems to enable DRR. 

Either way, it looks like there will be additional costs for some smaller companies in terms of time and money to deliver DRR.      

Improvements to Gabriel are to be welcomed by all but the impact of the potential costs of DRR – particularly for smaller companies – needs to be carefully considered before any decisions are made.    

Carl Wallis is head of group compliance at Bankhall