The Financial Conduct Authority’s chief executive has revealed it will be scrutinising financial firms’ ability to effectively oversee distributed ledger technology (DLT), straight-through deal processing (STP) and other technology-related outsourcing arrangements.

Speaking yesterday at the London Business School’s annual asset management conference, Andrew Bailey said that the advent of DLT opens the potential for STP to become even more efficient – with better management of counterparty risk, enhanced reconciliation and lower collateral requirements.

“As regulators, we will be looking at the ability of firms to oversee DLT, STP and other technology-related outsourcing arrangements effectively,” he stated. “There are also questions around accountability, if interruption to these services results in any losses for investors.”

DLT is the basis for blockchain and consists of a shared database which enables the keeping and sharing of records in a decentralised way, while ensuring its integrity through the use of consensus-based validation protocols and cryptographic signatures.

The FCA’s recently-published 2018/19 Business Plan explained that while technologies like DLT and STP can create consumer and competitiveness benefits, they also bring potential harms, such as service disruption, loss of data and exposure to cyber crime.

“We will engage with firms to ensure they allocate sufficient expertise and resources to these important developments to prevent consumer harm and avoid disruption of critical services,” the document read.

Sticking with FinTech, Bailey tackled the increasing use of artificial intelligence (AI) in areas such as risk management, compliance, investment decisions, securities trading and client relationship management.

“Investment managers may well have to increase their technology spends to keep up with AI developments,” he said, adding “Supervision of artificial intelligence remains a challenge and may also raise issues of accountability.”

Earlier this week, the UK government announced it is collaborating with more than 50 businesses and organisations to develop a £1 billion deal to put the UK at the forefront of the AI industry.

Finally, Bailey warned that the growth of online distribution channels and potential channel consolidation could lead to fewer routes to market being available for asset managers.

“If online distribution is dominated by only a few online distributors their market power may change the value chain dynamics. This could in turn lead to a reduced range of investment products available to investors,” Bailey commented, noting that the FCA’s platform market study will shed more light on this area when an interim report is published in the summer.

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