FCA recognizes importance of APIs and DLT for digital regulatory reporting

Maria Nikolova

The potential for immutability, security and speed offered by a private DLT are attractive, the UK financial regulator says.

The UK Financial Conduct Authority (FCA) has earlier today published a paper dedicated to digital regulatory reporting (DRR). The paper is published after, in February this year, the FCA published a call for input on how technology could achieve smarter regulatory reporting. The call for input outlined a ‘proof of concept’ developed at the November 2017 TechSprint which could potentially make it easier for firms to meet their regulatory reporting requirements and improve the quality of the data that they provide.

In the paper published today, the FCA summarizes the feedback received from the call for input, sets out its response to the feedback received and explains its next steps.

Respondents provided many suggestions on how the proof of concept developed at the 2017 TechSprint could be improved.

The concept of a ‘common data model’ was interpreted differently by respondents and the FCA received many suggestions on what a common data model could look like. The regulator believes that a common data model would realise efficiencies in the current regulatory reporting process.

Much of the feedback relates to the perceived high cost of disambiguation and subsequent data modelling internally within a firm. The regulator considers that a common model, based specifically around domain subsets (e.g., mortgage reporting) could help reduce the cost to firms and improve the comparability and quality of data for the regulator. There has been a high level of emphasis placed on the need for a data model detailing granular concepts in the pilot. The FCA believes the formation and accuracy of aggregate collections could be improved utilizing this approach.

Regarding application programming interfaces (APIs), the FCA agrees that these could play a critical role in achieving DRR and to potentially reduce the time taken to send data to the regulator. However, the capacity to call an API in a real-time environment is exciting from a regulatory standpoint however it opens up a number of issues for the firm in terms of capacity to review submissions before sending to the regulator.

The potential benefits of using distributed ledger technologies were also acknowledged. The regulator agrees that DLT and smart contracts could help in the implementation of DRR and is keen explore the potential of this technology. Work undertaken in the pilot has proved that regulatory code can potentially be sent as a ‘smart contract’ and distributed to a population of firms, the FCA notes.

The potential for immutability, security and speed offered by a private DLT are attractive, according to the regulator. Much of the pilot work has sought to re-use industry proof of concepts, of which much work has been done on the data delivery capabilities of DLT. However, the FCA is also conscious that it must overcome some key issues such as the maximum capacity for transactions on specific blockchains and the capacity requirements of individual nodes on the network.

Respondents believed the focus should be on reduction in time and cost for firms, not necessarily targeting the most technologically advanced solution, the FCA notes.

In terms of more recent developments, the FCA reminds that, in March 2018, the Chancellor announced that the FCA and BoE would run a pilot aiming to further explore whether digital regulatory reporting is possible. The pilot will develop a working prototype solution that demonstrates the end-to-end process for DRR and further evaluates the technological, legal and governance implications.

Following the conclusion of the pilot work in November, the pilot participants will publish a technical paper in the first quarter of 2019.

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