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It is not common for big business to praise regulators, yet that is the unusual position in which the UK’s Financial Conduct Authority has found itself — at least when it comes to the growing fintech sector.
Microsoft singled out the FCA for praise in a May response to the US Treasury’s Office of the Comptroller of the Currency, urging the OCC to copy the UK regulator to ensure that “innovation be encouraged, not stifled”.
The UK also topped a recent global survey, compiled by professional services firm EY, as the most fintech-friendly jurisdiction, with the industry generating £6.6bn in revenues and employing 61,000 people in 2015.
While there are obvious reasons why London should be a fintech hub — it has outsize “fin” and “tech” sectors in their own right — it was the regulatory regime in particular that cinched it, EY found.
“There are other regulators around the world that have more funds and resources, and other regulators with more powers. But it was really only the UK financial regulator that has built into its governance a mandate to promote innovation and competition, as well as the traditional mandates of financial stability and consumer protection,” says Imran Gulamhuseinwala, EY’s global leader for fintech.
The FCA was given a statutory objective of promoting competition in 2013, and the Conservative victory in the UK general election in 2015 cemented themes of innovation and cutting red tape. There has also been a desire, following the financial crisis, to break up the old, discredited monopolies that dominated financial services.
“Part of the competition objective involves promoting competition in the interests of consumers. One way that all sorts of competition regulators have thought about that is around disruptive innovation,” explains Chris Woolard, the FCA’s director of strategy and competition.
The FCA — at times at odds with the government since that election — has been keen to burnish its credentials.
In particular, it is the FCA’s so-called “sandbox” that has caught worldwide attention, including that of Microsoft. The sandbox is a way for companies to test products with temporary regulator approval. It is part of the FCA’s Project Innovate, which offers advice to companies about what regulations they need to bear in mind when trying to bring new products to market.
“It’s about demystifying [regulation] for a lot of firms,” says Mr Woolard. It offers the FCA the benefit of seeing what is out there, and bringing tech firms that were often keen to stay outside the regulatory perimeter within the fold.
The Australian government has been pushing a similar ethos. The Australian Stock Exchange’s decision to adopt blockchain technology recently grabbed headlines. As it happens, Australia also features among EY’s top-ranked jurisdictions, coming in sixth place.
“Our approach is consistent with our vision to allow markets to fund the economy and, in turn, economic growth,” says Greg Medcraft, the head of Australia’s securities watchdog. “Fintech — at the end of the day — is about making access to financial services easier, cheaper and more direct.”
The Australian watchdog has an initiative similar to the FCA’s Project Innovate — both are currently scrutinising businesses developing products using blockchain technology — and the two regulators signed a co-operation agreement earlier this year, in which they pledged to refer innovative companies interested in entering each other’s markets. That agreement has yielded one referral from Australia so far, according to Mr Medcraft.
Both the UK and Australia also have accords with the Monetary Authority of Singapore, another jurisdiction that scores well in EY’s survey after setting up a £100m fund for fintech projects.
There could be other reasons London is at the vanguard of fintech regulation: it learned many lessons from being at the centre of global financial scandals such as the rigging of the Libor and foreign-exchange benchmarks.
That has made the FCA not only keen to keep on top of the next possible scandal but also made a market for “regtech” — compliance products used by financial services companies or regulators.
“The [US] SEC and FCA are both exploring ways to effectively leverage voice, electronic communications and other data to stem fraud and improve compliance,” says Brian White, the chief operating officer of RedOwl, which provides risk-analysis technology. “Moreover, the regulators are watching the development of technology with a closer interest so they can stay abreast of the art of the possible, and be cognisant of the solutions that financial institutions are implementing to address the latest mandates.”
A wider question remains: if the financial crisis taught us anything, was it not that regulators should be wary, rather than welcoming, of innovation? After all, bitcoin has garnered many stories over its potential uses for organised crime, and insiders say other regulators, particularly in Europe, are sceptical of taking too liberal a position in case the next big scandal is embedded within fintech.
Mr Medcraft argues that policymakers worldwide have realised fintech will be transformative — and that has positive and negative connotations.
“The [public] want us to ensure those responsible for these developments — who generally have not been regulated in the past — don’t undermine market integrity or expose investors to risk,” he says.
Back in London, Mr Woolard argues that fintech start-ups are held to exactly the same rigorous standards as high-street banks.
“Traditionally, financial regulation is about making sure we prevent bad things from happening,” he says. “But in doing so we have to be very careful that we don’t create a world where rules favour the incumbents and prevent good things from happening as well.”