Over the last decade, football fans have increasingly been required to understand financial reporting and legal processes. Within the last season, two clubs (Everton and Nottingham Forest) were docked points after being found guilty of breaching the Premier League’s Profit and Sustainability Rules (PSR). The objective of PSR is essentially ensuring clubs don’t spend beyond their means and thus remain solvent and can continue operating.

This is somewhat comparable to the purpose of prudential regulation on financial institutions and something which is enforced by financial supervisors. Similarly, all licensed financial institutions must report their financial position to the supervisor, who then has a range of corrective and/or disciplinary measures at their disposal to ensure that the financial institution’s customers are not harmed due to mismanagement.

One of the key differences between these two scenarios is that the Premier League has limited supervisory powers at its disposal and, being a member-based organisation, sets its rules based on what the majority of member clubs desire – a case of the regulated institutions setting the rules under which they operate. These shortcomings, among others, have resulted in the UK government’s pending Football Governance Bill, which would create a new Independent Football Regulator (IFR) to ensure, amongst other governance objectives:

• Club financial soundness – “to protect and promote financial sustainability of individual clubs, ensuring that clubs take sensible financial decisions and consider the long-term when taking risks.”
• Systemic financial resilience – “to protect and promote the financial resilience of English football as a whole, ensuring that systemic risks and structural issues like the distribution of revenue through the pyramid are managed appropriately.”

Sound familiar?  It is likely that such a regulator would draw extensively from the experience of the well-established financial regulatory experience.

Let’s contrast this UK approach to that taken by Liga Nacional de Fútbol Profesional (LALIGA) in Spain. Spanish clubs are subject to comparable spending rules however, the enforcement of these rules is highly instructive. Where the Premier League only acts ex post, through the application of fines and penalties after a rules infringement, La Liga acts ex ante. La Liga will simply not allow clubs to register new players to play for them if they are in contravention of the spending rules. Barcelona has been the highest profile ‘victim’ of these restrictions, with the club regularly under financial pressure in order to register newly signed players.

While hardly without its flaws, the paradigm shift to ex ante, offers significant lessons and the potential for more effective supervision. For instance, in the example of La Liga, they prevent clubs from fielding any players they can’t afford. As Barcelona has demonstrated this doesn’t necessarily stop clubs signing new players regardless, but it does mean that the clubs in the league are competing under the same rules on the field. Whereas in the Premier League, an assessment needs to be made after the fact on the relative advantage a club gained for breaking the rules. This creates a high degree of uncertainty for not just affected clubs, but all clubs in the league who remain uncertain of the relative final points table until all prudential (PSR) assessments and punishments have been decided.

Bringing this back to the financial sector, the emergence and widespread adoption of new technologies mean that it is increasingly challenging, and in some cases all but impossible, to meaningfully enforce the rules ex post. But what if we could follow the example of La Liga and enforce the rules ex ante? Or in other parlance: institute compliance by design.

The public launch of the Project Mandala pilot for large-value cross-border financial transactions is an exciting illustration of how this might work. The pilot is focused on information sharing to facilitate cross-border payments and the system will only allow a transfer to be initiated if the regulatory requirements are already met.

Similarly, API standards, such as the FAPI (Financial Grade API) standards, rely on conformance testing – ensuring that all APIs are designed to ensure compliance with the security protocols before they are launched. Increasingly, financial regulators have the opportunity (and the necessity) to make this paradigm shift to build compliance into the design and infrastructure of new technologies because it may be the only way to meaningfully enforce the rules in an increasingly complex environment. Furthermore, for some use cases, it can also be far more effective, particularly in relation to proactively designing for effective market conduct, rather than relying on recourse mechanisms only after harm has occurred.

In an era of rapid technological evolution and increasing complexity in financial markets, it is imperative that financial supervisors consider not only how to get better and more efficient in their existing supervisory approaches. Increasingly, these supervisors must also consider how technology and data can, and will, fundamentally alter the traditional supervisory paradigms. Compliance by design is one manifestation of this. It is neither a complete nor a foolproof solution but it must increasingly be considered as an important new tool in supervisors’ toolboxes.