The UK's Financial Conduct Authority has recently published a 'call for input' about the idea of using technology to improve the way in which regulatory reporting happens. Compliance officers ought not, however, to expect to see radical changes in the way it regulates their firms.

This information-gathering exercise is part of a broader push by the regulator to embrace technology and improve the way in which it regulates (and in which firms perform) financial services is run and regulated. It is fair to say that it places the British regulator firmly in the vanguard of RegTech thinking.

It is easy to see why RegTech has become such a hot topic. Last year, all over the globe, there were almost 200 rule changes a day according to Thomson Reuters. MiFID II, FATCA and the GDPR all started life beyond our shores but have spawned huge changes in the UK, which explains why RegTech suppliers want to monitor the regulatory horizon, pick up rule changes automatically and use some form of artificial intelligence to interpret the meaning.

Our own research suggests that this is an area where automation could add enormous benefit, with large organisations spending almost as much time (40%) trying to understand regulatory changes as they have trying to implement them. However, the FCA is setting its sights higher with this latest consultation. Its ambition is not just to automate the translation of rules into a form that can shape implementation projects, but ultimately to eliminate the need for those projects at all.

This initial 'call for input' focuses on regulatory reporting - a field in which the FCA has already had some success with a 'proof of concept' that it evolved during one of its so-called TechSprints (regulatory reporting discussion events) late last year. The FCA has even more ambitious goals, however, and has begun to investigate model-driven, machine-executable regulation (MDMER) more widely. The technological challenges involved are huge but many in the industry believe that blockchain (which underpins Bitcoin) might solve them. Blockchain itself has a number of technical problems involving performance and security to overcome and it is not clear how it might displace established infrastructure. However clever it may be, most people will not use it unless it is available everywhere and that will require a technological revolution of the same order as a shift from fossil-fuel to electric cars.

Alongside that revolution, MDMER will require a massive change in the way the FCA approaches regulation. More than a decade ago, it moved away from invoking prescriptive rules and relied on its vague principles instead, holding firms to account for their motives when results are poor. This Orwellian approach may be fine for humans but is too woolly for computers, which need unambiguous, verifiable results to make decisions. It will simply not do to encode a test for any statement which suggests a firm must take 'reasonable' or 'suitable' steps, however much computing power one devotes to the task.

In order for this regulatory epiphany to occur, the FCA would have to accept that, with no gap between the writing and execution of a regulation, any mistakes in the coded rules are its responsibility.

The benefits could be enormous. Not only would firms be able to automate regulatory compliance as part of normal business; they would also have a testable standard by which to innovate and change without fear of retrospective punishment. In either case, the ‘unintended consequences’ that result from regulatory change would be identified far faster.

Enticing as this prospect sounds, it would be a huge departure for the FCA from its current position and would require a radical rethinking of the things that a regulator does. Instead of compliance officers with an encyclopaedic knowledge of the handbook, they would have to hire data technicians and programmers capable of monitoring and intervening in the financial system in real time.

From a technical perspective, MDMER is likely to become feasible in the next few years. It is less certain that the regulator is prepared to go through the necessary transformation in its make-up to take advantage of the new technology. Anyone who wants to take a punt on the future of RegTech ought to put his money on the evolution of existing IT rather than a revolution at the FCA.