FCA: Technology and innovation

In our fourth summary on the Financial Conduct Authority’s (“FCA“) consultation paper titled “Updating and Enhancing the UK Asset Management Regime” (DP23/2), we build on our previous overview on the structure of the asset management regulatory regime, by highlighting how significant technology and innovation are in financial markets and the operations of financial services firms.

The Financial Conduct Authority (“FCA”) recognises that technology is an essential part of the financial markets and the operations of financial services firms and that current regulations have not kept up with technological advancements and have thus fallen behind. The FCA proposes that regulations should reflect the standards and opportunities created by technology.

To identify opportunities for technological change in the funds industry, the FCA proposes engaging with firms and trade associations regarding proposals on fund tokenisation and its benefits. Fund tokenisation involves the issuance of a fund’s rights of participation (units or shares) to investors as digital tokens, usually on a distributed ledger. The FCA seeks views on how fund regulation should respond to the implications of a growing market in tokenised financial instruments.

Another proposition by the FCA includes engaging with the Investment Association (“IA”) to discuss the use of technology in the operation of the funds management space. For example, the IA’s ‘Direct2Fund’ proposition is an optional model that allows investors to transact directly with the fund when buying and selling units. This is an alternative to the current regime where the authorised fund manager buys and sells units on behalf of the fund and its investors.

The FCA will continue to enhance its understanding of market trends. The FCA recognises that some stakeholders may want it to explore the possibility of broadening the scope of eligible assets to include unregulated tokens. However, it is currently not possible for authorised funds to hold such coins.

Finally, the FCA is keen to hear about other regulatory changes that would enable fund managers to make wider use of technological advances without weakening investor protection.

Look out for our final summary on ‘improving the fund rules’ that we’ll be covering over the coming weeks.

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