City regulation: robocops can create post-Brexit advantage

The City of London needs to up its game to compensate for Brexit losses. That is one reason to welcome Friday’s push for more “RegTech” — regulatory technology — by the Square Mile’s governing body. Technological advances involving data science, machine learning and cloud computing have opened up new approaches to dealing with regulatory risk. 

The predicted Brexodus of financial assets and jobs is under way. Banks and insurers have transferred £900bn of assets, just under 10 per cent of the UK’s total. Staff moves have so far reached 7,400, according to consultancy New Financial. It is not all one way. Up to 500 EU-based firms are expected to open a UK office. But the toll on the City is likely to increase in coming years.

Lingering hopes that the UK would be granted more market access in return for an agreement on supervisory “equivalence” have largely faded. That creates an opportunity, as well as a cost. There is some room for manoeuvre. 

The UK wants to make its approach to regulation a competitive advantage. It aims to strike a balance between the EU’s detailed, prescriptive approach and the patchy US one, shown up by the Archegos Capital blow-up. Advocates of RegTech claim that it can play a part by enabling real-time market surveillance and helping to predict where risks will emerge. That could make supervision more preventive and less reactive. 

Such claims should be treated with caution. The UK’s “light touch” financial regulation in the noughties did not end well. But RegTech can reduce risks and improve efficiency. It could also result in a modest reduction in compliance costs — about £500m, or 0.05 per cent of the annual total, for Britain’s top five banks, according to RT Associates.

There is no silver bullet to deal with Brexit woes. RegTech will not transform demand by itself. But the City needs to consider all possible ways that it might boost its appeal.

The Lex team is interested in hearing more from readers. Please tell us what you think of “RegTech” and the post-Brexit City in the comments section below.