Digital Transformation of Financial Regulators and the Emergence of Supervisory Technologies (SupTech): A Case Study of the U.K. Financial Conduct Authority

The ability of financial regulators to supervise the fast-evolving and technologically enabled world of financial services is uncertain. Scars from the 2007–2008 crisis remain and, with novel technological approaches being deployed at an unprecedented rate, the question of regulatory ability is often overlooked. How can financial regulators meet the challenges of this growing ecosystem and prevent harmful outcomes for consumers and markets? Could supervisory technologies (SupTech) be the answer? This article provides a case study of the use of SupTech by the U.K. Financial Conduct Authority (FCA). Through 16 qualitative interviews with senior colleagues at the FCA and other regulators, this study focuses on how the field of SupTech has emerged and how the FCA developed its SupTech tool (BLENDER) to monitor market abuse in financial markets. Novel institutional drivers of SupTech emergence are identified, centering on ‘regulatory competition’ and how regulators’ mimetic behaviors result in competition and potentially contribute to further SupTech growth. Through a dynamic capability lens (Teece et al., 1997), the research also provides insights into the development journey of a SupTech tool. The article provides an important foundation for the research of SupTech and calls for further explorations within this field to provide regulators with the insight needed to deliver their objectives in the interest of consumers, firms, and markets.


Introduction
The financial services industry has historically been an early adopter of information technology (IT), due to its data-centric focus and close interrelationships between consumers, financial institutions, and intermediaries (Zhu et al., 2004). This adoption of IT fueled the increased digitization and digitalization of the sector, as firms looked for opportunities to improve processes and build new offerings (Alt et al., 2018). These factors together have resulted in the rise of 'FinTech,' "the fusion of finance and technology" (Goldstein et al., 2019(Goldstein et al., , p. 1647. Financial services firms are rapidly digitally transforming and adopting technologies such as artificial intelligence (AI) and cloud computing to develop efficiencies and improve their service offerings (World Economic Forum, 2020).
On the other side of the fast-evolving financial services sector are financial regulatory bodies, organizations with crucial regulatory responsibilities to ensure well-functioning markets. These organizations with restricted budgets, limited technological ability, and growing mandates are expected to be able to regulate efficiently and Nevertheless, technology drives complex challenges as well. For example, the lack of explainability of AI algorithms (Ostmann & Dorobantu, 2021), algorithmic trading and impact on market monitoring (Kunz & Martin, 2015), and the challenge of crypto-asset regulation (FSB, 2022) are all examples of difficult issues for regulators.
Therefore, it is to be expected that regulators, just like industry, are also turning to technology-for support in managing their growing portfolios of work and increasing their insight, efficiency, and effectiveness.

SupTech as an Emerging Field
Digital transformation has been a widespread effort within the public sector and government. The potential for technology to advance the delivery of public sector goals and objectives has been extensively researched (Dada, 2006;Fountain, 2001;Twizeyimana & Andersson, 2019;West, 2007). For financial regulators, however, the area is only now starting to be explored.
Industry research captures the digital transformation of regulators through the SupTech field. Multiple definitions currently exist (Zeranski & Sancak, 2020). These range from one of the original definitions by the Financial Stability Institute at the BIS as "the use of innovative technologies by supervisory agencies to support supervision" (Broeders & Prenio, 2018) to broader classifications. The rationale behind the introduction of this new term is to capture the extensive efforts by financial regulators across the world who use technology to assist their work programs.
In terms of types of regulators that are utilizing these tools, central banks and market regulators are often included and there is a broad regional split, with examples of more than 130 international regulators participating in global surveys on their use of SupTech (Cambridge SupTech Lab, 2022

Theoretical Foundations-Institutional Theory and Dynamic Capabilities
Given the inherent novelty, complexity, and breadth of SupTech and the digital transformation lifecycle, the focus of this article is on both the emergence and development aspects of SupTech through the research question of 'how does SupTech emerge and develop within financial regulatory agencies?' From a theoretical  Firstly, it explores institutional factors that are affecting the emergence process, using literature on institutional theory and information systems (Currie & Swanson, 2009;Hinings et al., 2018;Orlikowski & Barley, 2001).
As previously highlighted, SupTech's growth is on a global scale and most of the literature discusses the common and often duplicative approaches and challenges faced by regulators in SupTech development (Cambridge SupTech Lab, 2022;FinCoNet, 2020;FSB, 2020;OECD, 2019). This commonality provides a connection to new institutionalism and the isomorphic pressures that drive organizations to behave similarly. In this case, the isomorphic pressures drive regulators to pursue analogous approaches and use technology for the supervision of markets. (DiMaggio & Powell, 1983).
DiMaggio and Powell (1983) discuss in depth how institutions tend to copy and mimic each other, motivated by different pressures. These include meeting social expectations (coercive), tackling uncertainty (mimetic), or building legitimacy (normative). A relevant example is the mimetic behavior portrayed by financial services firms and regulators to create a crisis environment during the financial crash. It could be argued that a case of 'contagion of legitimacy' occurred between these two types of institutions in the United States (Riaz, 2009;Wolfson, 2013). The successes of firms caused a 'reverse-legitimacy' of the system and creation of 'blind spots' for financial regulators, resulting in the subsequent crash. Considering the similar approaches regulators are taking toward SupTech development, it could be valuable to explore the drivers and pressures for SupTech and understand the overlaps.
Initial comparison between the isomorphic pressures and identified drivers of SupTech development from literature highlight that both coercive and mimetic pressures exist, with limited normative pressures identified.
Interestingly, mimetic behaviors in technology are already identified, but there is no underlying detail around the level of solution or approach similarity. Secondly, from a development perspective, dynamic capability theory (Teece, 2007;Teece et al., 1997) is used to understand the development process and how regulators enable digital transformation and creation of SupTech tools. Dynamic capabilities are organizational capabilities driven by internal and external factors (a dynamic environment). They require dynamic efforts by organizations to reconfigure their processes and assets to address the opportunities and risks (Eisenhardt & Martin, 2000). Although some challenge the dynamism of regulatory agencies and the public sector (Piening, 2013), the dynamic capabilities processes of sensing, seizing, and transforming align well with regulatory processes of how regulation is created and implemented.
The fast evolution of the financial services ecosystem contributes to the appropriateness of dynamic capability theory ( Figure 3). The dynamism of the industry proportionally affects the dynamism of the capabilities being created. We can identify important links between the novel products and services being created by financial services firms, and financial regulators' opportunities to develop themselves to address these advances (Salvato & Vassolo, 2017 From a theoretical limitation perspective, institutional theory approaches in information systems research have been often applied with success. However, dynamic capability theory has been academically challenged due to its lack of specificity (Arend & Bromiley, 2009;Barreto, 2010). Also, as a strategic management framework, it was originally created with profit-making organizations in mind and research shows some limitations for using it for nonprofit/government bodies due to the lack of profit incentives (Bryson et al., 2007;Nelson & Winter, 2002).
Given these limitations, this approach combines these two theories to create a new theoretical framework

BLENDER History
This case study focuses on a singular project, the 'BLENDER' project within the FCA Market Oversight Division. It looks at the journey from its inception in 2013 to its current usage and future plans. BLENDER is a technology tool that assists supervisors to identify market abuse. Market abuse is behavior such as market manipulation, where market participants artificially affect the price of a stock, and these activities are enforceable by the regulator (FCA, 2020). BLENDER acts as 'middleware' and brings together data from different data sources (trading venues), 'blends' the data, and feeds it into a market surveillance tool to support supervisors to see transactions from multiple sources and identify patterns and diverse types of market abuse.
BLENDER was selected because it is a technology tool that enables the FCA to carry out one of its primary objectives of ensuring market integrity (FCA, 2016). It is also a finalized project, providing a complete 'picture,' and there was agreement to provide sufficient information from a confidentiality perspective. There are other SupTech tools at the FCA, however, due to market risks, limited information can be shared.
The BLENDER tool is an integral part of the market monitoring process of the FCA, without which it would not be able to have a holistic view of the market and see market manipulation occurring. It is a relevant example of a macro-prudential solution within the World Bank (2021)

Data Collection
The data collection approach for this research is qualitative, focused on interview data. The interviews allowed for a broad understanding of people's experiences and perspectives of digital transformation and SupTech, within the required structured method (Weiss, 1995). Interviews were conducted with 16 senior stakeholders from the FCA and other international regulators, using a specific interview protocol to understand their experiences in a consistent way with the conceptual theoretical framework as a foundation.
The interviews were delivered in a semistructured manner. This provided the opportunity for interviewees to share their experiences and dive deeper into areas that seemed more relevant for the research, while the open interview format put them at ease. The focus was on the interviewees' experiences, rather than their personal views and opinions. This was crucial to gain more tangible and credible insights into their role and how they partake in the digital transformation and SupTech work of the FCA.
This two-way approach provided a comprehensive view of the SupTech journey of the FCA by i) analyzing senior leaders' experiences and perspectives of how and why institutional factors drive the development of SupTech, and ii) understanding how the BLENDER project becomes developed through a dynamic capability lens. A similar thematic approach was followed for both levels of the data analysis. Following transcription of the interviews, the data was codified, identifying the basic, organizing, and global themes (Attride-Stirling, 2001).
By juxtaposing the relevant themes and wider context, several principal thematic networks were created to provide a consistent way of analyzing the data using literature and the theoretical framework. An example of a thematic network can be found in Appendix A.
For the contextual analysis of the institutional drivers of the emergence of SupTech, the focus was on identifying areas where the data is 'overflowing' the literature, looking for the novel factors that could be impacting the environment and growth of this field. The themes were analyzed in relation to the isomorphic drivers (DiMaggio & Powell, 1983) to understand which drivers were already recognized in literature (and which ones were not), while taking into account perspectives from FCA interviewees and international stakeholders to see potential overlaps and differences.
For the BLENDER tool, a dynamic capability lens (Teece, 2007;Teece et al., 1997) was applied, assessing how the thematic networks and interview data overlap with the key concepts. Overarching processes of sensing, seizing, and transforming were considered in the BLENDER context, in addition to understanding the external and internal drivers that motivated its development.

Regulatory Competition-A SupTech Institutional Driver
DiMaggio and Powell (1983) discuss the three isomorphic pressures that drive organizations into action. Table   2   However, one of the institutional factors that stood out is regulatory competition: a novel factor not found in literature. Participants noted the focus on SupTech and usage of technology to support supervisory processes was also connected to competition between regulators. Regulators could be seen as copying each other's efforts (mimetic behavior) and attempting to create the best SupTech solutions to keep up with the evolving market.
Through an advanced SupTech portfolio, regulators can benefit from a well-functioning market, reduce regulatory burden for firms, and improve the overall attractiveness of the market itself. They are able to highlight an innovative national financial services ecosystem where they have a reputation of being advanced and able to deal with the fast-developing financial services and FinTech market with potential national benefit.
These perspectives came from FCA participants:

I think inevitably that there is competition, this is a quirk of regulators, but it is definitely not hostile competition. (Interview 8) … a market that is open for business and a market that is good to do business, in an increasingly global world, increasingly, in a global world, that has to be, I think, a competitive advantage for a lot of regulators. (Interview 3)
And participants from international regulators also reflected: I think some countries are much further ahead than others, some will put more emphasis on it, they may see it as a competitive advantage. (Interview 15)

And so, we all work together, but if one (a regulator) is doing something cool, then there is immediate pressure on all the others to do something similar. (Interview 13)
This is not the only driving factor. Many of the participants spoke about the potential for regulators to more actively collaborate and how this could also be observed as 'healthy' competition. Nevertheless, it is interesting to consider how mimetic behavior by regulators, in the face of uncertainty, could be driven by competition, and whether such competition could either lead to divisions and lack of sharing or lead to higher collaboration due to common goals.

BLENDER as a Dynamic Capability
The overarching finding based on the data is that the BLENDER tool can be perceived as a dynamic capability for the FCA because it was driven by external factors (e.g., change in regulations) and internal factors (e.g., senior management decision-making). A detailed breakdown can be found in Appendix B.

Sensing
Within the dynamic capabilities framework, sensing is an important starting point, and it is the ability of organizations to sense opportunities and potential risks in dynamic markets. Within the wider FCA interview participants, their views on FCA's capability to sense opportunities and risks were mixed. However, for the BLENDER project, the consensus was that the FCA's sensing ability worked better than usual. The risk of cross-market manipulation was identified, and with the United Kingdom having the largest market fragmentation and highest number of venues emerging (CFA Institute, 2009), there was a recognition that something needed to be done.

We at the FCA recognized the risk that people could do transactions on multiple venues, and nobody would ever join the dots. BLENDER was the organizational response to that. (Interview 10)
The fragmentation in the markets opened up opportunities for new types of abuse… so the unique thing BLENDER did was to bring those venues, the data from those venues into one place, so we could supervise them in one place. (Interview 9)

Seizing
After the successful sensing process, the more complex question was the seizing element and how the opportunity could be addressed through products, processes, and services (Teece, 2007

Imitation, Collaboration, and Institutionalization
Seeing the institutional drivers of SupTech and the evolution of BLENDER as a dynamic capability, it is important to consider the overlaps between these areas, and what novel findings they might contribute to the field of SupTech.
It can be argued that there is a relationship between mimetic drivers, the development of dynamic capabilities, and their inimitability principles. Teece (1997) sees inimitability of dynamic capabilities as a crucial factor.
This includes the development of tacit knowledge to limit the ability to copy work and the use of intellectual property to protect them. From the broader perspective of SupTech development, this raises important questions, as regulatory participants often discussed how copying each other's approaches were important ways for developing their own work programs, for example:

The FCA is repeatedly lionized and lauded and referenced as having been emulated and copied by other regulators. What is less frequently mentioned is the FCA has copied and emulated others, maybe not in the regulatory space, but in the retail space or in the financial markets themselves, and the academic space. So, there is no shame about borrowing or copying. (Interview 2)
The answer to this challenge of inimitability could potentially be through collaboration -regulators can explore how they can co-create solutions and work together. Research has shown that regulators often seek support from other financial regulators in developing their approach to innovation (World Bank & CCAF, 2020). Participants often spoke about the great opportunity there is for closer partnerships between regulators: I suppose that collaboration is key. In this area and a new emerging field, we will be facing the same challenges and we can learn from each other and collaboration with knowledge sharing can be beneficial. (Interview 5) Seeing the interaction between emergence and development, and the organizational focus to continuously improve, we can also reflect on the following step and how SupTech approaches become institutionalized in organizational ways of working and gain legitimacy (Hinings et al., 2018;Tolbert & Zucker, 1996).
Participants noted that the FCA is still in the early phases of adopting technology. Exposure to data and digital technologies vary depending on factors such as the digitization of the sector and firm types. With the breadth of the SupTech field itself, it may prove difficult to conceptualize the legitimization and institutionalization of SupTech. However, it is still early to judge this, and participants noted that further scaling could drive adoption. The institutionalization of wider SupTech is uncertain, however, if we reflect on BLENDER, it provides functionality and crucial data that support the operation of the team. Without the tool, it would not be possible to monitor markets. This dependence on the tool could be perceived as it being legitimized in the eyes of the users. Time will tell what the tool's future evolution and developments will have on its legitimization.

Discussion
This research focuses on seeing how SupTech emerges and specifically develops within financial regulatory agencies, in this case, within the FCA. To answer this question, we will reflect on what the findings mean for the literature and the theoretical framework used, to understand the impacts on industry and academic research.

Regulatory Competition Expanded
Looking at the research question 'How does SupTech emerge and develop within financial regulatory agencies?' the approach taken was to look at areas where the findings provided novel insights not previously  Figure 5). There were many overlaps with the interview data, from the drive for efficiency and effectiveness, to improving insights and availability of technology such as artificial intelligence and machine-readable data.
As outlined previously (Table 2), these drivers could be assessed from an institutional perspective (Di Maggio & Powell, 1983) and the majority would fall under coercive pressures-regulators have a duty to fulfill, as expected by legal obligations and societal expectations, and they will do what they can to meet them.
However, an area that has not been recognized yet in SupTech literature and has been found in the data is 'regulatory competition,' originating from a combination of two factors. Firstly, aligned to mimetic pressures that cause market participants to copy each other to manage the ambiguity of the environment, interview participants referred to imitative behavior between each other, regulators 'coalescing' around SupTech, and starting multiple initiatives to explore how SupTech can support and improve their work (Cambridge SupTech Lab, 2022).

Figure 5. Demand and supply drivers of a SupTech strategy (FSB, 2020).
Secondly, participants reflected on how there is a potentially healthy dose of competition between them as a part of this SupTech development. This could stem from different reasons, for example, regulators wanting to improve the reputation of their organization, which has historically proven to be important for regulatory agencies and a way to build trust with industry and consumers (Gilad & Yogev, 2021;Yeung, 2009). Equally, it could also be driven by regulators wanting to create well-functioning markets to potentially drive investment and attractiveness. Some evidence exists that well-regulated markets could improve investment (Sinha, 2012).
In the context of the United Kingdom, regulation has historically been seen as a way to ensure a wellperforming market (Competition Markets Authority, 2020). This gains more relevance with the United Kingdom having left the European Union, and the newly assigned secondary international growth and competitiveness objective for the FCA, which will require the FCA to have regard to support the government's ambition to encourage economic growth (FCA, 2021;Norton Rose Fulbright, 2021;UK Gov, 2022). This poses an important question regarding the relationship between political will and the potential impact on regulatory behavior and competition between markets.

Sensing, Visionary Leadership, and Delivery Model
SupTech is a novel and complex area with multiple factors contributing to its development. Focusing on the FCA and the BLENDER project, several more detailed intricacies are provided on how SupTech develops. As we saw in the findings, the progress of the BLENDER project (and the tool itself) could be interpreted through the overarching processes of dynamic capabilities of sensing, seizing, and transforming (Teece, 2007;Teece et al., 1997).
In analyzing BLENDER, it appears that the tool's development was linear. There were particular elements that enabled the BLENDER tool to function as a capability for the FCA.

Sensing
Firstly, important processes that enable successful regulation rely on horizon scanning and anticipatory regulation, the ability for regulators to be able to identify issues early and react (National Audit Office, 2021;Regulatory Horizons Council, 2022). These processes could be paired with the sensing aspect of dynamic capabilities because they allow for the identification of opportunities to improve the organization in hand.
Interview data demonstrated mixed feedback for the FCA's overall ability for this process, however, for BLENDER, the sensing elements of a proactive attitude, in-house regulatory expertise, and adoption of academic insight made a difference and allowed for the FCA to react appropriately.

Seizing
Similarly, for the seizing process, the investment case and senior buy-in allowed for the further development of BLENDER. The more important factor was the governance model of allowing the in-house build to be driven by the Market Oversight Department, rather than the IT division. West (2007) reflects on the importance of flexibility and speed in government digital transformation, and it has proven crucial in the case of BLENDER as well. Moreover, for the successful seizing process, Teece (2018) discusses the managerial impact and the ability to seize the resources appropriately; with BLENDER, we saw the impact of the project leader and how their visionary drive and capability was instrumental in developing BLENDER.

Transforming
BLENDER was completed and is now a regularly updated tool and enabler for the FCA to collect and 'blend' data from multiple venues to identify potential market abuse. As mentioned, it has become a 'part of the ecosystem' and has achieved legitimacy in the eyes of its users (Hinings et al., 2018), but questions are raised around the impact of continuous transformation and development on its legitimization.

Implications for Regulators, Academia, and Industry
Regulatory competition is a known concept within policy development literature, and it has been explored how it can affect regulatory-government relations, standards development, and regulatory arbitrage (Frantz & Instefjord, 2018;Haufler & Maier, 2019;Radaelli, 2004). Nevertheless, the acknowledgment of regulatory competition within SupTech development could act as a positive driver of organizational change for regulators.
This could take form as increased information sharing between regulators to support knowledge building and increased collaboration between regulatory bodies through the mentioned different networks to advance SupTech (for example, potential efficiencies through the sharing of code).
In regard to BLENDER, due to the U.K. specific position and high number of trading venues, there have not been similar tools identified in other markets, therefore, not all lessons will be applicable to other international regulators. However, key insights of (i) regulatory recognition of technology as an enabler, and (ii) innovative and agile in-house development approaches, which supported the iterative build of BLENDER, are still

Conclusion
The experience of one regulator will not be the 'golden truth' for all regulators and it will not highlight every single opportunity or challenge that could inform other organizations' SupTech development. However, this research highlights two important discoveries that could be impactful for the industry.
The first of the findings is that SupTech emergence is partially driven by regulators being competitive organizations, who want to deliver positive outcomes for a plethora of reasons, some regulatory and some institutional. The realization of its existence might result in more open information sharing and more collaboration between regulators. In addition, it might support the establishment of further certifications and standards that are needed to formalize the field of SupTech and the required focus on assessing the success of SupTech development, ensuring the deployments are cost-effective and impactful.
Secondly, the research provides a comprehensive overview of one regulator's way of developing a SupTech tool and way of operating in the face of changing circumstances. It demonstrates how IS development foundations are applicable to regulators, and that leadership, delivery models, and senior stakeholder buy-in are critical for regulatory IT development and data science. It provides a blueprint for how regulators could think about the changing environment and highlights how the dynamic environment in which financial services regulators operate could result in dynamic efforts by the regulators themselves.
With the constant evolution of markets, regulators will have to leverage technology to support their activities (Coeuré, 2020). Consequently, academia has a critical observer role to play in collaborating with regulators and informing them through research of the potential opportunities, risks, and harms technology can pose.  https://www.fsb.org/2020/10/fsb-report-highlights-increased-use-of-regtech-and-suptech/ Financial Stability Board. (2022). Assessment of risks to financial stability from Crypto-assets.