Time for the FCA to build on its pro-innovation reputation
13 April 2016
The FCA’s Business Plan recognises the need to prioritise innovation and technology, but the regulator has plenty of work to do
Credit where it’s due. That the Financial Conduct Authority has chosen to make “Innovation and Technology” one of its seven priority areas for the year ahead, as revealed in its 2016-17 business plan this week, underlines why the regulator has a global reputation for its forward-thinking approach to technology. In an international marketplace for FinTech innovation, the UK is now widely recognised as a global leader; one important factor in that is the favourable regulatory environment the FCA has sought to provide.
FinTechs' operating in the UK point to the singular nature of the regulatory system here. While financial regulation is the responsibility of a triumvirate that includes the Bank of England and the Prudential Regulation Authority as well as the FCA, it is clear who does what, and where new innovation sits within the regime. Moreover, through Project Innovate, which the business plan promises to develop further over the next 12 months, the FCA has proactively sought to engage with FinTechs' seeking to overcome regulatory restraints as they develop new tools and technologies.
This is not to say, however, that there is no room for improvement. The UK’s regulatory infrastructure has largely been designed and developed as a response to the global financial crisis of eight years ago. The model that has evolved is well-suited to dealing with large and established financial services business, but probably doesn't lend itself to small FinTechs', start-up businesses and challenger banks. The burden of regulation is onerous for these enterprises.
Such businesses need timely interaction with the FCA and crystal clear answers to their questions, as they seek, at speed, to develop new ideas or pivot into new activities. Very often, FinTechs’ business models cut across a number of regulatory disciplines and raise issues that are not dealt with in any regulatory handbook. But the sheer number of fintechs' now in operation means individual businesses may find it difficult to get face time with the FCA; and very often, the regulator’s guidance may come across as too nuanced for a start-up that needs certainty in order to proceed.
The example of robo-advice, where the FCA’s business plan promises to provide further support to FinTechs' developing new models, is a case in point. The guidance the regulator offers is well-intentioned and positive, but in an industry scarred by years of traumatic mis-selling scandals, it may not provide sufficient clarity to innovators.
Project Innovate and the Innovation Hub that it now operates are a move in the right direction. The ‘Regulatory Sandbox’ idea that the FCA plans to develop further over the next 12 months, which will give FinTechs' a safe environment in which to test new ideas, has rightly been praised. These are initiatives that require deft execution and the regulator could well be challenged to create sufficient bandwidth to meet the needs of so many enterprising businesses.
Moreover, there are areas of financial innovation where the regulator should consider taking a proactive lead, rather than reacting to the work of others. Blockchain technology is one such area: across the financial services industry we are now seeing potentially important blockchain applications being widely tested in the lab, but few initiatives have yet made it to market, largely because they typically require the buy-in of many parties, each of which is more comfortable waiting for others to move first. A bolder approach, perhaps in keeping with the recent government paper on Blockchain, may require the regulator to act as a catalyst and prompt such a transition, facilitating blockchain’s move out of the lab by leading a market testing initiative.
On another note and in light of the 2016/2017 Business Plan being released, for the second year running we have invited Christopher Woolard, Director of Strategy and Competition, and an Executive Board member at the FCA, to take part in a live Q&A webcast. Please register your interest to take part in the webcast here.