The FCA and FinTech: playing by the rules to support FinTech disruption
Written by Jacqui Hatfield, Partner, Reed Smith and Melanie Shone, Trainee, Reed Smith
The UK now has one of the largest concentrations of emergent FinTech companies in the world. Innovation and investment can been seen among start-ups, innovation incubators financed or sponsored by banks, and governmental programmes to encourage FinTech development. Its importance is driven by both the desire from consumers for speed and security as well as a thirst from the traditional financial sector for greater efficiency and new ways to provide financial services. It has the potential to revolutionise customer experience (e.g. mobile banking platforms), to introduce new products and services (such as payment services and peer to peer lending), and to transform financial business models, for instance through the use of block chain technology. However, a number of questions remain. Should FinTech be regulated differently to the rest of the financial services sector, and is the UK regulator is doing enough to support the innovation (and therefore disruption) brought by FinTech?
The FCA has a statutory mandate that includes both consumer and wider market protection. Given the potential breadth of FinTech applicability noted above, it would be extremely unlikely for the FCA to adopt an approach that sets the regulation of FinTech distinctly apart from financial services more generally. We expect that, in time, FinTech will become an integral part of the financial services industry, similar to the transformation seen by the advent of the internet and digitalisation in the past 30 years.
To meet the Government’s objective and become ‘the premier location for financial technology businesses by 2020’ a more concerted and measured approach is required to draw upon the UK’s obvious competitive advantages. The Project Innovate and Innovation Hub has sent a very clear signal to the industry that the UK regulator is open to and supports FinTech innovation.
Wider Government support for FinTech is also clear - the Treasury has recently appointed Eileen Burbidge as the FinTech “special envoy”. The FCA has also been conscious to reduce regulatory uncertainty for FinTech firms where possible, for instance in clarifying the application of its financial promotion rules to social media. Project Innovate and the Innovation Hub offer an end-to-end experience allowing businesses to navigate the regulatory system as quickly and efficiently as possible. Roundtable discussions have also been set up to bring to light the perceived threats to innovation within the FinTech environment. “Regulatory Sandboxes” are also being considered, which would allow organisations to experiment with innovative products without immediately incurring normal regulatory consequences. By removing regulatory barriers to entry to the financial markets, the FCA hopes to encourage firms to enter and bring new ideas with them.
Given the pace of innovation in the FinTech space, it is essential that regulatory rules are as technologically neutral and forward thinking as possible – and that these are combined with proactive industry engagement and appropriate practical guidance from the FCA to provide much-needed regulatory certainty. This is increasingly necessary in areas such as financial crime, outsourcing and IT systems requirements. There is a substantial amount of uncertainty about how regulated firms can capture the benefits of cloud technology and digital currencies, although in respect of the latter, the FCA is actively engaging with the UK Government in this area. The FCA has assured the FinTech sector that the Innovation Hub will work to identify any specific rules or policies which restrict innovation in financial services, or those which should be introduced to facilitate it.
Feedback on the Project Innovate initiative has been positive, although some concerns have been raised about a lack of legal certainty from advisors who appear to be under qualified in legal areas and a lack of engagement with other regulators. However, FinTech innovation has the potential to transform how the entire industry operates. We’d like to see the FCA as a whole engage with FinTech innovation – and with all market players, especially larger established financial institutions.
The Chancellor’s Mansion House speech and Summer Budget highlighted a renewed emphasis on productive investment, innovation and competition in financial services. We and the industry will be watching closely to see whether this renewed political sentiment (and the change of personnel at the helm of the FCA) will translate into tangible regulatory support for the innovative and disruptive potential of FinTech.