Wednesday 10 March 2021 10:35 am

DLT may not be the silver bullet, but it's worth a shot

Crypto AM Parliamentary Special with Lord Holmes of Richmond MBE

Financial Services Bill: Time to Act

Part Three of Five

Mid-week, I have pleasure in penning day three’s reflections on the Financial Services Bill, currently making its way through the House of Lords.

Today, I want to set out my hopes for the bill in relation to potential distributed ledger technology [DLT] use cases, digital instruments, the regime for open finance and the recommendations of Ron Kalifa’s FinTech Strategic Review.

This afternoon I will be putting forward amendments covering these areas as well as the two AI amendments discussed in yesterday’s piece.

Develop Distributed Ledger Technologies (DLT) Blockchain Use Cases:

Following our departure from the EU it seems an ideal time to review all of our financial services regulations and indeed the rules of our financial services regulators. I put this broad point on day one of the committee stage. 

There are, however, a number of specific instances worthy of their own consideration – particularly where new technologies, such as DLT, could be experimented with to establish their potential positive impact.

Two examples are the current transaction reporting requirements under both the Markets in Financial Instruments Directive (MiFID) and the European Market Infrastructure Regulation (EMIR). In my amendment, I am asking the Secretary of State to report to Parliament on…

(a) the operational burdens imposed on financial services institutions by transaction reporting requirements under the Markets in Financial Instruments Directive and the European Market Infrastructure Regulation, and

(b) whether those burdens may be alleviated through the development and deployment of blockchain-based tools, such as transaction ledgers, accessible by regulators and trade repositories.

As in my 2017 report, Distributed Ledger Technology for public good, I am not suggesting that DLT, or Blockchain, is the silver bullet. What I am saying though, is that it is more than worth putting to experiment, and government support is needed to proof and pilot.  We have this specific opportunity right now in relation to MIFID and EMIR. I firmly believe we should take it.

Similarly, the opportunity should be taken to proof and pilot the use of DLT in market infrastructure. I will be putting forward an amendment, asking the Secretary of State to report to Parliament on the options for a pilot regime for financial services market infrastructures based on distributed ledger technologies. We have a competitive edge in this technology, we have the ecosystem, we have brilliant British businesses ready to play their part.

I am also putting forward an amendment asking the government to report to Parliament on the legislative and regulatory changes required to enable the modernisation of UK law to allow the UK’s financial market infrastructure to process digital instruments.

There are numerous issues and elements worthy of consideration. One, certainly podium placed, is the need to dematerialise securities at the same rate as the European Union. Whichever way you cut it, and whether you like it or not, it is a race and the EU completely understands this.

The government should give careful consideration to the need to review insolvency of companies regulated by the Prudential Regulation Authority (PRA) or Financial Conduct Authority (FCA), central securities depositories regulation and the settlement finality directive to assess the potential uses of digital technology.

I also think it is worth considering  how the trading of tokenised securities (such as company shares using a Blockchain based register) may be facilitated on investment exchanges and multilateral trading facilities. 

My amendment asks that the government consider whether and how digital technology in post-trade processes should be embraced.

Big opportunities I believe, not overnight but neither never.  Thirty-five years on, we have the potential for Big Bang 2 – we need not even mention the .0!

Extend Open Finance

I am putting forward an amendment seeking clarification from the government as to their intentions in relation to open finance. 

Open finance is the concept of extending open banking to a wider range of financial products. The Payment Service Directive 2 (PSD2) limited open banking to just payment accounts.

Consumers can’t currently get full control of their financial lives through a third party provider. For example they can’t view their savings accounts in a dashboard, or ask a third party provider to transfer funds from one ISA to another. The Financial Conduct Authority believes open finance can eventually extend across:

  • savings and investments
  • consumer credit
  • mortgages
  • pensions
  • insurance

We are at a real moment for acceleration, thanks to the excellent efforts of all of the open banking work.  This affords us the opportunity to move at pace, we must. 

Again,  it’s a race, the EU knows it.  The Commission is considering it right now.

My amendment asks the Secretary of State to  lay before both Houses of Parliament draft regulations requiring that providers of financial services data must make that data available to appropriately licensed third parties on a non-discriminatory basis. This will obviously also require putting right some of PSD2’s sub optimal elements, not least API restrictions.

The outcome of the FCA’s open finance consultation and the Treasury’s payment landscape review should enable the UK to get ahead through agility and acceleration and a proportionate, competitive and dynamic set of rules. The financial services industry must, as always, be at the heart of this customer centric co-production.

Implement Kalifa review recommendations

Finally, the Financial Services Bill seems an opportune moment to ask the government to report to Parliament on the recommendations set out in Ron Kalifa’s financial technology strategic review. 

Ron’s review is a fine piece of work, engaging hundreds of experts across FinTech and financial services.  It has excellent chapter heads and it sets out a clear, achievable roadmap for the UK to further lead in this most important sector. 

Many of the recommendations in the review are not in need of additional primary legislation or regulations and the government can – and I hope they will – just crack on with them. 

Others however do and the elephantine question in our committee deliberations later this afternoon is simply this, if not this financial services legislation then what? If not now, then when?

My eleven amendments today are focussed on the, perhaps infinite, opportunities presented by the range of new technologies we have in our 4IR enabled hands. 

Financial services, like every sector of our economy, indeed like so many areas of our lives, has the chance to face forward and consider the alchemy that is created with the right mix of talent and technology.

I hope the government will consider my amendments and be bold in leading the way and supporting these efforts to mobilise talent and technology in financial services.

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Lord Chris Holmes is Vice Chair of the Parliamentary Groups on: FinTech, AI, Block Chain and 4IR.  He has co-authored Lords Select Committee reports on: Digital Skills, Social Mobility, Financial Inclusion, AI, Intergenerational Fairness and, last year, Democracy and Digital Technologies.  He also authored a report on ‘Distributed Ledger Technology for public good: leadership, collaboration, innovation.’

Further detail about amendments to the Financial Services Bill can be found on Chris’s Blog: https://lordchrisholmes.com/

Website:https://Chrisholmes.co.uk

LinkedIn: https://www.linkedin.com/in/lord-chris-holmes/

Twitter: @lordchrisholmes

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