General

FR1198 / 16 March 2023

HM Treasury

Digital technologies - HM Treasury publishes Digital Technologies Report and its response - 15 March 2023

HM Treasury has published the Digital Technologies Report (the Report), produced by Sir Patrick Vallance, Government Chief Scientific Adviser, and HM Treasury’s response (the Response).

The Report is the first report to be published as part of the Pro-Innovation Regulation of Technologies Review, a programme of work announced by the Chancellor in the 2022 Autumn Statement to advise the government on how the UK can better regulate emerging technologies and enable their rapid and safe introduction.

The Report considers how pro-innovation regulation can support emerging digital technologies, focusing on the specific challenges for artificial intelligence (AI) and data, as well as short-term actions to address regulatory barriers for autonomous vehicles, drones, cyber security, and space and satellite technologies. It puts forward recommendations for government across three broad areas:

  • supporting a step-change in the UK’s regulatory approach to AI;
  • facilitating greater industry access to public data; and
  • government signalling and leadership to focus regulatory efforts on innovation.

The Report indicates that regulators should safeguard against the risks of AI, as well as balancing the opportunity cost of a lack of innovation and the social benefits its deployment might bring. The government should work with regulators to develop a multi-regulator sandbox for AI, to be operational within the next six months, as well as a clear policy position on the relationship between intellectual property (IP) law and generative AI to provide confidence to innovators and investors. The government should also avoid regulating emerging digital technologies too early to avoid the risk of stifling innovation.

HM Treasury’s response to the Report accepts its recommendations and sets out how these will be implemented, including:

  • engaging immediately with regulators, including the Digital Regulation Cooperation Forum, to prepare for the launch of the new sandbox, based on the features and principles laid out in the Report;
  • acting quickly to provide clarity in relation to the application of IP law to the AI sector; and
  • providing regulatory certainty to unlock the ‘huge potential’ of AI in the UK. 

The Response also indicates that the government acknowledges the importance of regulating at the appropriate stage in a technology’s life-cycle and, more broadly, the need to set out a long-term strategic vision to support the promotion of emerging technologies, in line with the government’s broader Plan for Digital Regulation and Digital Strategy.

Pro-innovation Regulation of Technologies Review: Digital Technologies

HM Government response to Sir Patrick Vallance’s Pro-Innovation Regulation of Technologies Review: Digital Technologies

Webpage

Financial Conduct Authority

Fast-growing UK firms - FCA publishes findings of multi-firm review - 10 March 2023 

The FCA has published a new webpage setting out the findings of a multi-firm review of ‘fast-growing firms’ (FGFs) to identify, assess and manage the risks arising from their activities. The multi-firm review was conducted during 2021-22 and was based on 25 FCA solo-regulated UK firms which have experienced fast growth over a three-year period.

The review assessed the impact of firms’ rapid growth on their financial and non-financial resources through review and analysis of firms’ business plans, internal capital adequacy assessment process (ICAAP) documents, wind-down plans and other documents submitted by firms. The FCA found that for most firms:

  • Their risk management framework and governance arrangements have not kept pace with the growth of their business activities. While firms’ risk management practices may have been proportionate at the point of authorisation, they have not evolved at the same rate as the business, resulting in an increased risk of poor outcomes for consumers.
  • Assessments of the adequacy of firms’ financial resources have generally not considered the growth of their underlying businesses. This has resulted in assessments which are not commensurate with the business’ size, business model and underlying risks. This may affect the financial resilience of firms, increasing the risk of their disorderly failure.
  • Wind-down plans are inadequate, given the fast growth of the firms reviewed, increasing the risk of harm in the event of firm failure.

The FCA notes that all FGFs should continually identify, assess and manage the risks arising from activities and associated growth. In particular, the FCA expects firms to:

  • have robust plans in place to understand likely future growth and to maintain sufficient resources to manage growth or unexpected stress;
  • update risk management frameworks (including risk appetite and limit framework) and governance arrangements to ensure that they remain proportionate and fit for purpose;
  • ensure that assessment of adequacy of financial resources is commensurate with the size, complexity and forecasted growth of the business, including regular stress testing and scenario analysis;
  • embed a liquidity risk management framework including liquidity risk policies, controls, contingency funding plans and stress testing;
  • ensure wind-down plans are robust; and
  • provide accurate and complete data in their regulatory submissions.

Fast-growing firms multi-firm review

Perimeter report - published by FCA - 6 March 2023

The FCA has updated its perimeter report, setting out what it does and does not regulate. This report describes specific issues the FCA sees and the action it is taking in response. Since its last update, in July 2022, the FCA has improved how it spots irregularities or fraud for firms seeking authorisation. Points that the report addresses include the following:

 

  • Appointed representatives (ARs): the regulator has intensified its supervision of firms that are providing ‘regulatory hosting services’. It has written to firms setting out its expectations and is visiting a subset of firms to challenge their business models. The FCA will: (i) take mitigating action where it finds evidence of harm; and (ii) use the output to inform potential rule changes. The FCA has also strengthened its approach for firms applying for authorisation to help identify risky business models and higher risk principals.
  • ESG and rating providers: the FCA notes that HM Treasury is preparing to consult on bringing ESG data and rating providers within its remit. In November 2022 the FCA appointed the International Capital Market Association (ICMA) and the International Regulatory Strategy Group (IRSG) to act as the Secretariat of an independent group mandated to develop an industry-led, voluntary Code of Conduct for ESG data and ratings providers.
  • Funeral plans: pre-paid funeral planning activity has been regulated by the FCA since July 2022. The FCA confirms that, if funeral plan providers are placed into administration, insolvency practitioners are permitted to continue operating existing, but not new, funeral plan contracts.
  • Deferred payment credit (DPC) and buy-now-pay-later (BNPL): the FCA confirms that it intends to consult on conduct standards for the DPC sector once BNPL is brought within the regulatory perimeter. The extent of these rules will depend on the scope of BNPL firms and activities brought within the perimeter through the Treasury’s legislation.
  • Senior Managers and Certification Regime (SMCR): the FCA states that, although the Financial Services and Markets Bill 2022-23 (FSMB) enables the extension of the SMCR to recognised investment exchanges (RIEs) and credit rating agencies (CRAs), it does not enable the regime's extension to payments and e-money firms. The FCA sees value in extending the SMCR to these firms and is exploring possible options with HM Treasury.

The FCA states that it intends to update this report regularly.

FCA perimeter report