The future of finance

The Bank of England’s excellent report on the future of finance, released earlier this year, has plenty to say about the Bank’s role in that future. To help finance serve the digital economy, the Bank should:

1. Shape tomorrow’s payment system

   Our payment habits are shifting as we increasingly use our cards, phones and electronic wallets instead of cash. The underlying infrastructure will need to adapt to these changes. As these payment habits shift, we need a national payments strategy to improve our payments infrastructure and regulation. Bearing in mind what has happened in Sweden, where the slide into ceaselessness was not planned, we need a strategy which doesn’t leave anyone behind.

   This isn’t, of course, about the technology. Regulation also needs to be updated to reflect how risks are shifting within the payments system and to reduce complexity of that system.

2. Enable innovation through modern financial infrastructure

   The next generation of financial firms will likely widely use public cloud technology. Firms should be able to benefit from the agility, cyber-security and platform for innovation that this technology offers. If they are to do this, then less costly and more reliable digital identification (my emphasis) will be essential to harness the benefits and opportunities of the digital economy for UK households and firms.

3. Support the data economy through standards and protocols

   Financial services’ use of data is already highly regulated, but businesses, policymakers and regulation have to keep pace with new techniques and alternative data sets. In particular, automated decision-making based on machine learning is one of the most important trends in technology today and will become widespread in financial services. Ensuring artificial intelligence (AI) is used responsibly will be an important task. The responsible, explainable and ethical use of machine learning/AI will be important to achieve.

4. Champion global standards for finance

   Emerging markets will likely play an ever greater role in the international economy and global financial system as they continue to grow (faster than advanced countries) and open up their economies. The Bank needs to work intensively with others to create, develop and implement the global standards and deep supervisory co-operation that are crucial to ensuring open and resilient international financial flows.

5. Promote the smooth transition to a low carbon economy

   Climate change poses risks to financial stability and threats and opportunities for firms. An earlier and smoother adjustment to a low-carbon economy can help mitigate this. Better disclosure of climate-related risks is necessary to steer investment towards initiatives that reduce the world’s dependency on fossil fuels and promote investment in energy efficiency.

6. Adapt to the needs of a changing demographic

   As our population ages, it is becoming clear that policy changes will be needed to facilitate greater security in retirement. Finance will also need to support major changes in demographics and working patterns as well as the evolving needs of savers and borrowers.

7. Safeguarding the financial system from evolving risks

   Financial stability supports innovation, prosperity and sustainable growth. New entrants and “unbundling” of the financial services business model may change market structures. Open Banking gives consumers more control over their data. But authorities need to address concerns around liability and operational resilience.

   Market based finance has bought welcome diversity and choice in funding options. But possible vulnerabilities around liquidity mismatches and investor behaviour need to be understood and managed, particularly following a decade of ultra low interest rates. There is an obvious concern that the new finch ecosystem has yet to be tested by shocks of one form or another.

8. Enhance protection against cyber risks

   The financial system is a constant target for cyber criminals. Regulators and the private sector need to maximise their efforts to keep up with this dynamic threat. Finance can help businesses manage cyber risks, build resilience and recover from incidents through wider access to cyber insurance products. But to become widely adopted, cyber insurance needs richer datasets.

9. Embrace digital regulation

   Markets have been made far more transparent in response to the financial crisis. Technology and new techniques are now essential to monitor them most effectively. There is huge scope for the Bank of England to use of advanced analytics for analysis of macroeconomic trends, financial surveillance and supervision. The Prudential Regulation Authority (PRA) needs a long-term strategy for data and regulatory technology. This requires investment and collaboration from firms. Costs may rise temporarily but then transform in the longer term.

I think it is fair to say that Bank is doing a great job