Technology and AI Will Play a Part in Future Regulation

One of the Bank of England’s Senior Figures has said the Bank and the Prudential Regulatory Authority (PRA) are keen to see how technology and artificial intelligence can enhance the ability for insurers and brokers to meet their regulatory responsibilities.

James Proudman, Executive Director of UK Deposit Takers Supervision released a speech he was due to give yesterday at a conference on the ‘Impact of AI and Machine Learning on the UK economy’, organised by the Bank of England, CEPR and Imperial College.

He said: “Significant advances in technology have transformed our ability to gather, store and analyse data in multiple forms from multiple sources, be they structured or unstructured, more quickly and more cheaply.

“So now is a good time for regulators to stand back, and ask whether – while holding the line on prudential standards – we are collecting data in the most efficient and cost effective way, from the perspective of both regulators and those we regulate. And if we are not, how we should implement change to advance our statutory objectives most effectively, both for us and those we regulate.

“As the Governor explained at Mansion House last summer, in response to the Future of Finance report, ‘this is the new frontier of regulatory efficiency and effectiveness. [We are] exploring how new technologies could streamline firms’ compliance and regulatory processes while improving our ability to analyse relevant data,”

He added as a first step in the Bank of England’s strategy, it has published “Transforming data collection from the UK financial sector”.

“This is a ‘green’ discussion paper, in which are set out a range of options for the future of regulatory data collection, and invite feedback from industry and others,” Mr Proudman added. “At this stage, the Bank of England and the PRA are agnostic about the end outcome – in the sense that we do not have a strong view at this stage about which technology will best promote our objectives, recognising that these differing objectives may impose certain trade-offs.

“For example, some technology solutions may be more efficient, but come at greater fixed cost – potentially creating a trade-off between our safety and soundness objective, and our secondary competition objective.

“There may also be trade-offs between the different benefits on offer. Some technology solutions may offer shorter production times for regulatory data but come at the expense of accuracy. There may also be broader benefits that flow from greater standardisation at the operational level, reflecting data’s role as public good.”

He added that use of technology was already being felt by the regulators.

“There are plenty of opportunities for the application of AI, machine learning or other advanced analytic techniques into supervision,” Mr Proudman added. “Across the PRA, there are increasing examples of the application of new advanced analytics and machine learning: be it to improve the quality of firm-by-firm peer analysis; monitoring of social media for developments in authorised firms; standardising our assessment of certain credit risk books; to automation of the verification of large exposures rules.”

“Technology is rapidly changing the world around us,” he said. “As prudential regulators, we need to understand the impact of that technology. First and foremost, we need to understand its impact on the firms we supervise – and the financial system as a whole – if we are to understand properly risks to financial stability, and safety and soundness – just as we have always done. There is nothing new in this.

“But what is new is the need – and opportunity – to take advantage of the new technology in our own business processes to change the way supervision is done.”

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