This year, the UK’s Financial Conduct Authority (FCA) released its Three-Year Strategy for 2022 to 2025 outlining what it expects all firms to deliver across the markets it regulates.

The strategy builds from the outcomes made last July, to become “more innovative, assertive and adaptive”, thereby transforming the FCA into a “data-led platform that can face the threats and opportunities of the future”.

The data-led and outcomes-based approach to its supervision of the financial services sector was welcomed, demonstrating that the FCA has a finger on the pulse of technological as well as economic and geopolitical developments. It is notable, that the Authority recognizes the increased risk that consumers are being exposed to by the cost-of-living crisis.

Addressing new, digital risks

While this is encouraging, it is questionable whether it will be sufficient to provide adequate protection against the potential impact of accelerated digitalization. This is increasing efficiencies across the financial services industry, but digitalization of financial services is also exposing providers and their customers to a host of new risks and potential abuses.

Against this backdrop, the FCA’s three-year strategy may not be adequate in addressing the risks associated with digitalization. The regulator’s update is commendably long on its internal commitment to adopting a more data-led approach. But it is short on proposals to ensure that the 51,000-plus companies within its regulatory purview adopt similarly decisive and holistic strategies.

The FCA’s document makes no recommendations for encouraging financial organizations to implement strategies to harness complete and transparent data. This would provide a platform upon which these organizations could deliver their business outcomes in a consistent and measurable way. This would allow the FCA to monitor these outcomes promptly and effectively, thereby supporting the regulator’s objective of ensuring that financial services markets function well.

Building credible data foundations

To their credit, most organizations in the sector have identified their targeted functional outcomes aimed at providing customers with fair value, suitable and appropriately diverse products, and confidence in markets. However, many are behind in harnessing the complete, accurate, timely and consistent information necessary to implement a credible and actionable data strategy. This is essential for optimizing processes based on robust data, which is an important tool to help organizations identify the technology best suited to their needs. In other words, there is a clearly delineated sequence that financial services companies need to implement – and in most cases, the efficient harnessing of data should be the next item on their to-do list.

If it is to fulfil its responsibilities towards financial services’ consumers who are being offered an increasingly large range of digital services; it is incumbent on the regulator to ensure that the organizations it oversees implement credible data management strategies. Using its influence to mandate providers of financial services to build and maintain solid data foundations would have a range of tangible benefits. Retrieving consistent data on this would, for example, shed light on the capital allocation of every company that it regulates.

This would strengthen the FCA’s prudential supervisory capabilities by ensuring appropriate capital allocation across the industry. It would also sharpen the analytical power of the regulator’s toolkit by helping it to compare similar types of financial institutions, within the retail or wholesale sectors, for example. This would give the regulator an early warning system, allowing it to identify potential risks arising from vulnerabilities such as inadequate capital or weak exposure management.

Adopting this approach to data capture, storage and analysis is critical if financial services companies are to safeguard against adopting a silo-based structure in areas such as risk management and finance. For example, risk management may encompass up to 50 functional outcomes. They can range from new product development and client onboarding to exposure management and stress/scenario testing, all of which are interdependent.

Likewise in finance, where functional outcomes may include general ledger accounting, accounts receivables, capital planning and liquidity management. Again, ensuring that the underlying data across all these functional outcomes is managed and analysed on a consistent and transparent basis can improve operational efficiencies, reduce risks and maximise the cost-effectiveness of providing managed services to clients.

Quality and consistency

The FCA’s strategy recognizes the importance of high quality and consistent internal data. The regulator asserts that it is “increasingly data-led, focusing on the effectiveness of systems and controls”, which supports its objectives of detecting financial crime faster and removing FCA-regulated fraudsters from the financial system. It also advizes that it is committed to improving its reporting requirements, for example, through automated data collection: “we will continue to find new ways to reduce the regulatory burden on firms at all stages of regulation, balancing the need for efficiency with effective oversight.”

This implies that the provision of opaque or inconsistent data erodes the effectiveness of the regulator’s supervision. By inference, this therefore exposes end-consumers of financial services to avoidable risks and costs.

Against this backdrop, it is curious that the FCA’s message is not reinforced by a commitment to introducing the regulatory conditions that would be required to mandate firms to meet stronger data storage, management and reporting standards.

This should not be interpreted as giving financial services companies a licence to maintain inadequate or inconsistent data. Quite the reverse. Chief data officers (CDOs) and chief operating officers (COOs) should introduce standards that exceed the FCA’s requirements rather than wait for the regulator to act. Rather than relying on the FCA to map out strategies on their behalf, CDOs and COOs should be proactively establishing their own enterprise strategy yardsticks.

In other words, financial services companies should elevate the conversation beyond meeting the minimum regulatory standards and towards acting as standard-bearers for superior operational expenditure (Opex) and data outcome strategies.

The journey to having high quality, business-valuable, regulatory compliant data starts with creating and sticking to a unified data strategy across the organization.