Regulation arguably doesn’t have the best reputation in the cutting-edge tech sector. Critics slam red tape for stifling creativity, while the regulators themselves get stick for failing to keep pace with ever-changing markets.
This contempt creates dilemmas in the field of fintech, an industry which melds the fast-paced world of technology with the highly-regulated field of finance.
Policymakers are left in a quandary; how do you create an environment that allows businesses to develop innovative products without putting the fragile post-2008 financial system at risk? That’s a question Christopher Woolard, executive director of strategy and competition at the Financial Conduct Authority (FCA), has found himself tackling during his career at the watchdog.
If anybody knows how regulation can drive a market place, it’s Woolard. Even before joining the City watchdog, he was well-immersed into the world of competition.
Having studied history at Kings’ College London and then a masters at London Business School, Woolard spent stints as a group director at Ofcom, a senior manager at the BBC and a senior civil servant at the Department of Trade and Industry.
“I’m not sure anyone runs away and says they’re going to be a competition person,” the 45-year-old quips.
“People join the circus like that…[but] it’s just a fascinating way of beginning to address problems. It’s really about getting under the skin of markets, really understanding how they tick.”
One of the projects Woolard has been tasked with at the FCA is Project Innovate. Launched in October 2014, it gave the regulator the chance to have a closer look at the fast-paced fintech scene and to help guide it through the red-tape landscape.
To their horror, the 25-strong team discovered some startups were going to great lengths to get their business outside regulatory reach.
“The worst one I saw was a small startup, so five guys, and they’d spent £750,000 in six months trying to design something with their lawyers which avoided regulation,” Woolard recalls.
“Actually, the position they really needed to fit in within the regulation was very simple. We established that with them in the course of an afternoon.”
While Project Innovate was progressing nicely, Woolard and his team noted that, although they’d opened their doors to businesses of all sizes, few of the bigger players had come knocking.
Meanwhile, other ideas presented to them were so innovative, the regulators had no clue how to treat them.
Out of this two-pronged dilemma, the regulatory sandbox was born, providing firms with a safe space for testing.
Sitting within the wider Project Innovate, the sandbox allows businesses to test products in a live environment for a set time period and under the watchful eye of the FCA.
The cutting-edge startups benefit from the sandbox by testing their products in a scaled-back capacity before letting it loose on the wider market, while incumbent players feel more comfortable about potential product failure as it is clear it is on a trial basis.
For the sandbox’s first cohort last autumn, the FCA received 69 applications, of which it selected 18, including banking behemoth HSBC and insurtech startup Blink Innovation, which was working on an automated claims process for cancelled flights.
Woolard is “pleased” with how the sandbox has panned out so far, with 77 firms, including some from outside the UK, racing to join the second cohort.
It’s possibly this interest from outside the country which leads Woolard to conclude a red-tape bonfire is not the key to a competitive market post-Brexit.
He warns that, although Brexit might be a good opportunity to tidy up rule books which have become unruly over time, it will not bode well for the UK if it immediately drops its efforts to be equivalent to the rest of the EU.
He adds: “When we think about what really makes London a global financial centre, one of the key things is its reputation and the efficiency, the effectiveness, the well-run nature of the markets that operate here and that we regulate. I think we would have to think very, very carefully about diluting that.”
Looking to the future of fintech, Woolard believes larger players will adopt tech at a faster pace and smaller firms will either continue to scale up organically or be snapped up by bigger companies.
“From a consumer’s perspective, this is maybe quite an exciting time where we begin to see change in the financial services industry that is perhaps not dissimilar to some of the changes we might have seen in other industries that have been impacted by technology in the last 15 to 20 years,” he says.
“So far, largely financial services has been quite resistant to that and we’re seeing a period open up where, actually, we could see some real change.”
But he adds: “There’s always a danger of having a crystal ball.
“All predictions are always proven wrong.”