Just before Christmas I suggested that the FCA needed a new direction post-Bailey. It may already have found one although it is clearly not the direction everyone wants.

This week the regulator announced plans to become, in its words, a ‘data-driven’ regulator with the Gabriel business reporting system - familiar to planners - already being refreshed as part of this.

I’m not 100% sure what a ‘data-driven regulator’ is but leaving that aside there is some logic to this approach, although it cannot be the Holy Grail for the FCA.

The watchdog’s proposals are long term, five years, and would mark a shift towards greater collection and analysis of data from regulated firms. This would then be followed up by intervention where the data showed issues.

Greater automation of data collection and intervention based on data analysis would become the two twin drivers of regulation for this decade if the proposals go ahead.

I’m only speculating here, but I can see for example how a sudden rise (or decline) in pension transfers would prompt interest from the regulator which has often been accused of being too slow to act in the past, perhaps due to a lack of early data warning signals.

Would the London Capital & Finance mini-bond debacle have been spotted earlier if the FCA had noticed hundreds of millions of pounds in sales being made by a firm only a few years old? Possibly.

If this better collection of data, perhaps almost in real time, leads to better and quicker responses by the watchdog then I’m all for it. I understand it will be a burden for many regulated firms, particularly smaller ones, but the benefits could be worthwhile longer term and may actually lead to fewer firm visits, form filling and so on.

But, and it’s a big but, a shift towards a regulatory strategy driven mostly by data collection could well be a very dangerous move. Computer algorithms may be great at spotting statistical anomalies but I suspect they are not so great at spotting financial crooks.

This is a point the Personal Finance Society has already wisely made in an early call for human intervention to be part of any future regulatory strategy. Data can help the human intervention but it should not replace gut instinct and wise experience. I’m completely behind this view because it makes sense.

I have an image of hundreds of robots sifting through data at some futuristic FCA warehouse reporting all is ok while crooks around the UK are busy looting investors’ funds because the data they supplied was false.

In many of the cases of financial crime I’ve covered over the years duplicity, lying and false figures are often the hallmarks of the financial crook. They are well versed in throwing the regulator off the scent. This will not change, vast amounts of data collection or not.

So extra muscle for the regulator from data analysis is good news. A replacement for smart human regulators will be a backward step.

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Kevin O’Donnell is editor of Financial Planning Today and a financial journalist with 30 years experience.  This topical comment on the Financial Planning news appears most weeks.

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