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 recently, 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.
Fintech firms 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 isn't room for improvement. The burden of regulation is onerous for small fintechs, start-up businesses and challenger banks. 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. 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.