The future of finance report

Published on 20 June 2019

Introduction by Huw van Steenis

The Governor asked me last year to lead a review of the future of the UK’s financial system, and what it might mean for the Bank of England’s agenda, toolkit and capabilities over the coming decade.

We agreed this work should be grounded in how finance serves the economy. And in turn, how the Bank can enable innovation, empower competition and build resilience. The team and I have kept this uppermost in our minds.

Over the past nine months, I have met with over 300 entrepreneurs, financiers, tech firms, global investors, consumer groups, charities, policymakers and business leaders across the United Kingdom and overseas.

PDFFuture of finance report

Bank of England response

Huw van Steenis

My findings and recommendations in a nutshell

A new economy is emerging driven by changes in technology, demographics and the environment. The UK is also undergoing several major transitions that finance has to respond to.

What this means for finance

Finance is likely to undergo intense change over the coming decade. The shift to digitally-enabled services and firms is already profound and appears to be accelerating.

The shift from banks to market-based finance is likely to grow further.

Ultra low rates, new regulations and the need to invest in updating their businesses mean many UK and global banks are struggling to make their cost of capital.

Brexit and political and policy changes around the world will also impact the shape of financial services.

Risks are likely to shift.

Regulators and the private sector have to collaborate in new ways as technology breaks down barriers.

Finance is hugely important to the UK and the right infrastructure can support new finance.

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.

Business models are also changing: fintechs, start-ups and big technology companies are moving into payments.

As our payment habits shift, we need a national payments strategy to improve our payments infrastructure and regulation — which doesn’t leave anyone behind.

Payments regulation also needs to be updated to reflect how risks are shifting and to reduce complexity.

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.

The Bank of England will need to build expertise and play a leading role in making sure firms use it in a safe and sustainable way.

Less costly and more reliable digital identification will be essential to harness the benefits and opportunities of the digital economy for UK households and firms.

Better co-ordination of major regulatory projects could help innovation and improve resilience, while increasing operational effectiveness of firms.

3. Support the data economy through standards and protocols

Data standards and protocols are the bedrock of a robust and dynamic financial system. They can enable innovation and competition and reduce the cost of finance. But privacy, security, liability and trust will be of ever greater prominence.

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.

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. The responsible, explainable and ethical use of machine learning/AI will be important to achieve.

To help finance support the major transitions, the Bank should:

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.

As the largest international financial centre, the UK has an important role to play in helping finance the needs of a green and global economy.

The Bank of England oversees the stability and effectiveness of the UK financial systems.

To achieve this, 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.

Achieving the Paris Agreement’s 2°C target requires huge investment in infrastructure that can only be made possible by mobilising public and private finance.

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

Individuals are living longer and increasingly have to provide for old age, as traditional state and corporate pension schemes have been transformed.

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.

To ensure that finance increases resilience to new risks, the Bank should:

7. Safeguarding the financial system from evolving risks 

Financial stability supports innovation, prosperity and sustainable growth. And as the financial system evolves and innovates; the Bank’s approach to financial stability will need to keep pace.

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.

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.

Cyber penetration and simulation exercises to explore vulnerabilities and encourage firms to build greater resilience will be essential.

The key part missing in the UK cyber defences today is an industry response to a data wipe at an institution. Building a strong model for data recovery should be a priority for industry. US Sheltered Harbor is a useful concept to explore.

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.

Routine tasks should increasingly be automated. A shift will free up resources to focus on value added analysis.

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.