Martin Wheatley, the CEO of the FCA, has delivered a speech about “regulation – supporting vibrant markets“.
The speech is wide ranging – it covers:
- Competition in the retail banking space: “you’re more likely to divorce … than separate from your current account provider…“;
- Crowdfunding, P2P lending and other types of alternative finance: “shadow banking is now almost as important to many European companies as bank debt, with 41% of corporate funding coming from alternative sources. Compared to 43% from banks“;
- Behavioural economics: “we now know the addition of more data is not always reflected in the mark-up or quality of retail services [and] prices don’t always respond effectively to new information … [So] why did so many consumers make the wrong decisions, or at least ‘sub-optimal’ decisions, when selecting financial products? Why did they sometimes reward poor products with their custom? In the UK, the classic example … was … PPI. [It] should never have been as successful as it was: … £45bn [in] premiums or a 490% return on equity [with] premiums adding 20% to the cost of a loan [when] the claims ratio only averaged around 16%”.
Wheatley also considers #FinTech and innovation:
“Quite what effect this will have … we don’t know … Pessimists argue that lower product value … might … reduce the incentive for incumbents to offer differentiated products, and point to an array of potential issues … like cyber crime. The optimists … talk of … solv[ing] problems… They talk of its potential to strip away product value on the supply side and add it to the buy-side. Benefitting consumers. They also … point to the rapidly escalating significance of financial innovators to the domestic economy. The UK’s alternative finance market has been close to doubling in size, year on year. Providing close to £2bn of funding last year alone.
… Already, corporate clients at some … banks are conducting billion dollar payments through their mobile devices. Non-cash payments outstrip cash payments. And the UK and Ireland are … the fastest growing fintech incubators in the world, developing at an annualized rate of some 74% since 2008 … What we certainly don’t want to do … is create [an] environment … where innovators see the UK as an unhelpful place to conduct business.
So, from October last year, the FCA’s ‘Innovation Hub’ has been giving direct support to innovators [around the navigation of regulation; and … in terms of authorisation, with significant face-to-face engagement to support firms through to formal application;] as well as looking at how you might adapt the regulatory regime to support useful innovation [so looking at the regulatory regime itself … to actively identify the processes or policies that might need to change]. At the moment, key areas here include questions over how innovators access finance; uncertainty around regulation in areas like digital currency, and the FCA’s own paper-based processes…
And this, perhaps, is the key point here. It is an imperative for regulators to keep in step with the economic and social cycles around it … this inflection point we have … arrived at – where analysis of the past has given way to hope for the future – requires a regulatory response. It also, however, requires positive engagement from industry. The wrong approach … is for firms to unpick principles in the pursuit of profit with no apparent social utility. … The right approach, is to pursue sustainable growth on the basis of positive outcomes for clients and consumers. Both retail and wholesale. Regulation, as we have now learnt, has a profoundly important role to play in that equation. It can, and should, be [a] friend to both business and consumer.”
This, at least arguably, suggests both (a) an increasing level of FCA enthusiasm for #FinTech and innovation, confounding those who thought the Innovation Hub was window dressing at launch; and (b) a degree of regulatory flexibility that seemed unlikely, only a year or two ago.
If that’s the position at the “top of the shop”, what’s it like on the ground?
The recent speech by Christopher Woolard, the FCA’s Director of Strategy & Competition, “The FCA and innovation“, suggests the FCA’s probably doing its best in difficult circumstances (although this might not have been the message the speechwriters meant to convey). For example:
- “Since October , we [have] received 170 requests for support. We provided support to just under half … For the vast majority …, we follow up by phone or in person. And we ask all firms what they thought … 83% … rated their overall experience … as good or excellent. 89% thought the promptness of our response was good or excellent [too]“;
- “We also held two seminars on how to become authorised for start-ups. We will soon announce more dates …“
- The FCA and its Innovation Hub:
- Are offering quick “informal steers”, which firms can rely on at their own risk rather than seeking individual guidance” which creates a safe harbour but takes months to arrive;
- Are working with the Treasury to develop a “regulatory sandbox” so that firm’s can test some products and services before they incur the cost of applying for authorisation; and
- Have given a commitment to publish a “Call for Evidence” in the autumn that will help them to identify (a) barriers to innovation; (b) where changes are needed; and (c) where better communication would help because “there are some barriers to innovation grounded more in perception than reality“.
This might not sound like very much to those who follow these things; and, in some ways, it isn’t. But, for an organisation that’s working within a tight legal framework, with several crises only just behind it, it’s actually a great deal. There aren’t many things the FCA can do. Current evidence suggests it’s probably doing most of the things it can.
There’s more information about the Innovation Hub, its events, its eligibility criteria, and its contact details, here.
If you’d like to know more about what a law firm and the FCA can do to help innovators innovate within the scope of the existing law; or what HM Treasury could do to improve things even more, get in touch.