In August 2014 Chancellor George Osborne set his stall out clearly stating the UK government’s intention to make London the FinTech capital of the world – and so maintain its position as, arguably, the world’s most important financial center in the years to come. It’s working, and London is widely acknowledged to be leading the way into a new era.
The main instrument? RegTech – the redesign of financial regulation “to be pro-innovation”. Prioritising innovation in order to benefit consumers, with the resulting ‘Sandbox’ concept already being copied and emulated around the world.
Meanwhile the USA seems to be headed in the opposite direction with the recent revelation that the treasury are proposing to needlessly duplicate regulation in a way that threatens the existence of equity crowdfunding in the USA, even before it can get started. How did we get here – and will the incumbents win – and manage to shut out and shut down the insurgents? Why might this be happening in America, the land of the entrepreneur, of all places?
“Although much more needs to be done, Congress has taken a number of steps on a bi-partisan basis to improve the regulatory environment for entrepreneurial capital formation. But the SEC and the Treasury Department often seek to make things worse. The Treasury wants to impose AML rules on crowdfunding funding portals even though they are prohibited by law from holding customer funds. Treasury is clearly contemplating a new and presumably complex regulatory regime on marketplace lending and P2P lending. The SEC has proposed two rules to add tremendous new paperwork requirements on private offerings. Moreover, the SEC rules implementing the JOBS Act are needlessly complex. U.S. regulations are a major impediment to entrepreneurship and access to capital.”
-David Burton, Senior Fellow in Economic Policy, The Heritage Foundation
Man Controlling Trade, For The Benefit of…
But which man (or, these days, men and women)? Why – with what mix of motivations? Most importantly for whom?
The first time I visited the FTC’s building in Washington DC I was very taken by these statues because of the strength of the vision and depth of thinking they represent. I’ve returned to that thinking many times in the intervening decade or so.
Regulation: An Expensive Necessity – Not a Luxury
The necessity for regulation: The need to prevent the strong, once they attain a position of dominance or power, from taking advantage over the weak – made necessary by the inbuilt excesses in human nature.
This has always tempered my arguments against over-regulation and downright dumb-regulation as I’ve been at the forefront of, and sometimes a lone voice in, the debate about the regulation of crowdfunding and other fintech over the last few years.
Never more so than with the unfolding drama enveloping Lending Club. But bad, outdated or obsolete regulation can be as bad as none – as we’ve seen so clearly far too many times already.
An Innovation Unit
Back in August 2012 when, in frustration, I first called for an innovation unit to be setup within our financial regulator (then know as the FSA, now the FCA – Financial Services Authority) – an idea that is now going around Europe and the world, along with the regulatory sandboxes it has spawned – It was, I admit, a faint hope. The more so as everyone laughed at that time.
Today the situation in London and the UK is transformed. Not only are our Financial Regulator (our SEC) actively assisting, working with, startups and firms on new services and financial innovation, but they’ve been explicitly tasked for this – and more. By none other than George Osborne (Chancellor of the Exchequer as his office is known here) who head the UK’s Treasury. It was he in August 2014 that flipped the rule book on innovation. Until then UK regulation was written on tablets of stone. New elaborations being added all the time. But any suggestion of change was anathema (and greeted with the kind of nine-yard stare you might expect were you to suggest legalising bank robbery).
#RegTech Flipping Regulation
Osborne declared that henceforth “Regulation has to be pro-innovation” to maintain the leading role of London globally. That it must actively embrace and accommodate innovation – a reversal initially unpopular at the FCA’s Canary Wharf HQ in which henceforth regulation must adapt around innovation rather than the other way around.
Until the start of this there was an unbroken consensus. This is the environment – how the world is, and works. You work within it. You might (as Crowdcube did) push at the walls but any suggestion that a regulation, in its current form, might have outlived it’s usefulness was treated as heresy and with deep suspicion as to the motives of whoever might be making such a wild suggestion.
Now this has a name: #RegTech, and is spreading around the world. Together with tacit acknowledgement that the world itself has changed and left the regulation behind.
#RegTech – An Idea Who Time Has Come
There’s an interesting parallel in the bind in which the global major banks have found themselves with IT. How do you change the engine and flight control systems and remain in flight? Because this is the, gradually worsening, challenge they’ve been facing (and funking) for more than the three decades since I started my career in systems design for them. Tinkering at the edges is an, increasingly precarious, necessity. But thoughts of overhaul or replacement have board members running for the doors.
In the UK it’s the Treasury who’ve been first to understand the depth of the changes under-weigh – and that this is a tide that even they cannot hold back. So, after many meetings, briefings and more or less formal submissions over many months they took the lead, commissioning Sir Mark Walport’s report that was to fire the starting gun on what we now call #RegTech.
I’m an unashamed Americophile. Like most of my generation I grew up viewing ‘the land of the free’ as a land of endless opportunity through the lens of a myriad TV shows (and wondering how heaven could improve on what I was seeing). I’ve visited many times since, have many American friends, and have come to regard California as my spiritual home – despite the fact that the reality has long displaced the myth.
Which is why it saddens me so deeply to see the USA headed in the wrong direction – led by the US treasury, who’ve published their intention to not just needlessly increase, but actually duplicate regulation and the costs and work involved needlessly. The only effect of which will be to hobble, or more likely kill your emerging equity crowdfunding sector.
Who Regulates the Regulator?
This has been cast as a turf-war – and perhaps there is an element of truth in that – but there can be no doubt that the chief beneficiaries of this dead-hand are the incumbents who’re responsible for the mess we are in.
How did we get here? Regulation was invented to protect the weak from the strong, now it’s used by the strong to bolster their position and the wealthy to increase their wealth not by industry and innovation but by preventing it.
An Iceberg That Only Ever Grows
Regulation, when you stand back and look at it, is like an iceberg. It has a huge cost as well as a deadening effect, and adds friction with each additional layer. But most of this is buried deep beneath the surface. Unlike icebergs which shrink as they move into warmer waters the iceberg which is financial regulation only ever grows.
The losers are not, as is so often thought, the industry that’s regulated*. Not only do they pass on the cost to consumers but the opportunity cost in terms of innovation and a wide range of other costs – not to mention limiting competition – is certainly huge and largely incalculable. It is consumers, and especially the poorer who end up excluded, and who pick up the ever-increasing tab.
Beyond The Innovation Unit – Rebalancing Regulation and Regulators
I believe that this could be systematically addressed and rebalanced relatively simply – almost as simple an approach as the ‘innovation unit’ (I’m a social psychologist by education and a technologist and engineer by training and experience – so it comes relatively naturally to me to look at the appalling, arcane and unbalanced pipework that has resulted from decades of horse-trading and neglect). So if anyone out there is interested in making this happen, for the sake of the USA and the world, then do please get in touch with me.
I believe that this is as crucial for the USA as it is for the entire world. Because while #Regtech has ensured that regulation in London (and increasingly elsewhere) is starting to adapt and get a little smarter and more modern, but there’s a very long way to go with this.
Regulation in a Fast-Changing World
The world has changed. The fundamentals have shifted, thanks to ‘digital’, ‘networked’ and not least the social web which now connect most of humanity and will soon hyper-connect us all, transforming the landscape, tipping power structures in their head. So transforming the art of the possible.
Fast is the new Big – and Agile is the new Superpower
Yes, and ‘agile’ (not China) is the new super-power that will transform nations and the world economy (look at tiny Estonia, who’re leading the world with its “e-Residency” service for example – re-thinking world citizenship for the modern age years ahead of anyone else).
This transformation is just beginning. It can be no surprise that those at the top of the America’s power pyramid have grown used to the many privileges that size has afforded them.Perhaps, and perhaps understandably, they don’t want to see that this new world is already unfolding around us.
But this tide will come in regardless. Because agile is the new super-power. America, a union of states, is as diverse as it is monolithic – but can it become as agile as it is big. I hope that this might serve as a wake-up call so that we might find out.
But the truth is the politics have been so divided and divisive, even on this crucial non-party issue, that the USA has yet to take what is the first crucial step – to begin to adapt regulation to innovation, and the new world in which we live. This month will be a crucial test.
The alternative is to continue to seek to turn back the clock, for the benefit of the incumbents. Hardly ‘the American way’ – not to mention ultimately futile. A revolution which started in the USA is now racing around the world. It would a great pity if the land of the free joined the back of the queue to benefit from it.
Barry James is a serial entrepreneur and technologist, writer and conference creator who founded TheCrowdfundingCenter, now a global resource for #Crowdfunding, & FundingHubs an innovation to support entrepreneurs globally. He has a long history in #Fintech stretching back to the late 1970s. Founder of the UK’s first national conference, Crowdfunding:Deep Impact, he has been at the forefront of the development of Fintech and crowdfunding in the UK, and internationally, since its earliest days helping found the UK’s All-Party-Parliamentary-Group on the subject and, founding #RegTech, influencing the nature and direction of regulation. As a pioneering systems and eco-system architect, he and his team remain active in creating new models and new technology, including the creation of more than 100 funding hubs worldwide.