This is an excerpt from The Future of Risk Management and Compliance 2023 report.

Under the technology and innovation pillar of The Edinburgh Reforms, the UK Government outlined its desire to ensure the regulatory framework supports innovation and leadership in emerging areas of finance, facilitating the adoption of cutting-edge technologies.

The Reforms note that under the Financial Services and Markets Bill (FSMB), stablecoins will be able to be used as means of payment, and will bring cryptoassets further into the regulatory space. The Reforms also included confirmation that in 2023 the Financial Market Infrastructure Sandbox will be put into practice and the Bank of England will be considering the development of a digital pound.

The Bank of England, along with dozens of central banks and governments across the globe, is exploring what a digital pound, or central bank digital currency (CBDC) would mean for the future of money. The Bank of England – HM Treasury Taskforce published a consultation in February 2023, setting out its assessment of how a retail CBDC would look. The consultation paper notes that “it is too early to decide whether to build the infrastructure for one [digital pound], but we are convinced the next stage of preparatory work is justified.”

Over the four month consultation period, ending June 2023, the Taskforce will engage extensively across the UK to collect views from all interested member of the public, experts and organisations.

Having embarked on investigating the potential feasibility of a European CBDC in 2021, the European Central Bank is expected to decide on whether it will continue its efforts to pursue a digital euro by spring 2023. Should that decision be made in the affirmative, which appears likely, next steps would require testing and consideration of the technical arrangements needed.

Digital Markets Act should lock down competition rules for Big Tech

The EU Digital Markets Act (DMA) entered into force in November 2022, which in tandem with the Digital Services Act (DSA), underpinned by competition law, is set to shape the way in which large technology platforms will be required to behave with respect to data use and sharing. The DMA will designate big tech, such as Meta and Apple, as ‘core platform service’ providers or gatekeepers, and will prevent them from being able to abuse their market power.

The DSA has a wider scope, focusing on online safety and transparency, by setting obligations for digital services which act as intermediaries between consumer and services.

When outlining the type of organisations or platforms that the DMA states should fall into the scope of this regulation, it reads that online intermediation services can also be active in the field of financial services, and that they can intermediate or be used to provide such services as (listed non-exhaustively): investment services, insurance and reinsurance operations, banking services, operations relating to pension funds, services relating to dealings in future or options.

While the bulk of discussion around the DMA has centred on reining in control over tech behemoths, questions remain around the true impact the new rules will bear on financial services. While not all financial institutions are likely to fall directly within scope as a ‘gatekeeper’, many will, and the cloud service providers banks increasingly rely upon will likely fall within scope. Other large software platforms that financial institutions rely upon may also fall within scope, potentially causing a headache for banks should their providers be unable abide by DMA obligations.

Regulatory collaboration will be increasingly pivotal

Navigating this complex environment of global instability alongside the evolution of financial technology while implementing a constant flow of new rules and regulations is a colossal feat for financial institutions across the globe. This challenge must be approached in tandem with regular and effective collaboration both amongst regulators, and between regulators and the private sector, in order to develop and implement rules that are fit-for-purpose and as future-proofed as possible.

The UK government has very clearly set out its stall in terms of its plan for the future of financial services, explains Indwar, most recently seen with the Edinburgh Reforms, its Future Regulatory Framework, and Wholesale Markets Review. The three combined initiatives will require a material change to the current UK financial services legal and regulatory framework. “To date, we have seen significant engagement between the regulators and the industry in the development of new or amended rules, and various policy directions have shifted as a result of industry feedback. Dialogue with the industry of this nature is absolutely key if the future regulatory regime is to be fit for purpose. Equally we would encourage regulated firms to seek to engage with the Government and regulators sooner rather than later, should they have concerns with any proposals or indeed suggestions on how they may be enhanced.”

Regulators and regulated parties must work together in good faith if the industry intends to adopt meaningful, focused regulations to protect consumers, institutions, and investors, states Ansari. He adds that “many regulatory bodies are playing catch-up, particularly with crypto assets and their nexus of related technologies and instruments.”