One of the FCA’s statutory objectives is to promote effective competition in the financial services sector in the interests of consumers.
As the economy continues to settle into a new phase, it is fair to ask whether the FCA should adjust the balance of its focus on market enforcement and instead ensure resources are allocated to the next generation of challenges.
The FCA has taken a positive step by issuing a “Call for Input” on the regulatory barriers to innovation in digital and mobile financial services.
The regulator’s initiative recognises, on the one hand, that regulation can be a barrier to entry and, on the other, that the growth in consumer use of digital and mobile technologies could be used to reduce financial exclusion and deliver more competitive financial services.
Features of change would ideally see a far greater proportion of people using basic financial planning tools to help them manage their finances.
There are many aspects to this: managing household finances more efficiently, the ability to access market returns on a cost efficient basis, managing debts more intelligently, resolving poor credit, and obtaining fairly priced insurance.
Uncomfortable questions arise that could in part be addressed by innovation: do those most in need of a surer financial footing suffer a “poverty premium” when accessing financial services?
Technological innovation is a key factor in delivering wider access for two reasons: use of data and market penetration. Technology has exponentially improved data collection and processing. For example, insurers use in-car data to price risk more fairly and reduce the cost of claims management and fraud.
In terms of market penetration, the Office for National Statistics indicates that 84 per cent of households are online and over 62 per cent of adults use a smartphone. So a wider audience could access financial tools through a medium they are comfortable with – good news for the UK’s numerous non-savers and the nearly 2m unbanked adults.
Innovation is, however, fragile and, in the regulated sector, the environment is particularly unforgiving for innovators, with the onus on track record, a tough pre-launch licencing regime, capital solidity and deliverance of complex consumer protection measures from the get-go.
While innovative ideas originating within established firms also risk becoming bogged down, with concerns of “conduct risk” and anti-money laundering taking centre stage, newcomers find it extremely difficult to even budget for the time and expense it takes to obtain a necessary licence.
The FCA’s Innovation Hub established last year is an important step in the right direction, but it could usefully graduate to providing more determinative input. The potential for misconception as to how regulation applies to an innovative business model is itself a risk, and innovators can find themselves burning through seed capital to reach a definitive position.
One option would be to build on the approach the FCA has taken with new bank applications and adopt a staggered approach to licence applications, enabling firms to demonstrate the basics, such as the fitness of the senior team, method of client funds protection, a mastery of the benefits/risks to the consumer, and an appreciation of where they will fit into the regime.
This initial approval could allow the company to raise funds and address its staff and business resources needs with assurance, before proceeding to demonstrate full compliance before launch.
It is also valuable to test innovative ideas on consumers for feedback on how they work in practice. The regulatory regime does not have a reliable quantitative test that will allow a business to do a limited “beta” launch without the full regime applying.
On the basis of conditions designed to underwrite any consumer risk, the FCA could look at an “L Plate” regime that allows real time market testing. A valid question is whether increasing the numbers of people able to participate in financial planning should be prioritised over compliance.
While it is paramount that the rules are designed to get consumers into the right products and services for them, a concern is whether the intensity of the current compliance process means that, for reasons of risk and cost, the financial services community does not deliver to large parts of society. Since using technology lowers costs and increases accessibility, steps could be taken to help innovators better manage the regulatory risks.
There are many factors at play here, with no single answer or responsible party, but it would be welcome to see statistics around savings and payment account use become a prominent yardstick of regulator performance in addition to headline grabbing fines.