The Financial Conduct Authority (FCA) released an update this week on both their mission and an accompanying business plan. The lead securities and market regulator, posted its broad strategic objectives, as determined by Parliament;
To ensure that relevant markets function well – and three operational objectives to advance:
- Protect consumers – to secure appropriate protection for consumers
- Integrity – to protect and enhance the integrity of the UK financial system
- Promote competition – to promote effective competition
While all three objectives should be obvious to the common reader, the third objective, regarding competition, is typically ignored by similar governmental entities around the world. Yet it is this objective that compels the FCA to ask tough questions that help to mitigate superfluous rules and to right-size regulation for emerging firms.
The FCA regulates some 56,000 firms that employ more than 2 million individuals in the UK. Obviously the financial services sector is an important strategic industry fueling the UK economy by its global importance – thus the prominence of Fintech initiatives.
Andrew Bailey, the Chief Executive of the FCA, said in a speech they must secure an appropriate degree of protection for consumers but that consumers should take responsibility for their actions. Sure, there are differences in experience in expertise and this is taken into consideration. This is a common discussion amongst financial regulators globally.
More interestingly, Bailey posed the question as to “what is the role of the regulator in enabling and facilitating change and innovation in the industries it regulates?” But then by fostering competition the FCA is compelled to “proactively enable innovation.” It really makes sense.
“You may be familiar with Project Innovate and our regulatory sandbox. Along with other FCA initiatives these are encouraging and supporting the application of new technology,” stated Bailey. “If imitation around the world really is the sincerest form of flattery, these are successful initiatives. And they are important.”
Within the Mission publication, the FCA clarifies;
“We can use our convening powers to bring participants together and explore innovative ways of improving market effectiveness, such as developing Fintech (using technology to deliver financial services) to reduce the cost of financial services or to extend access to vulnerable consumers. We can also help both new and established businesses bring innovative financial services and products to the market …”
But within the Business Plan there is the other side of the discussion. New technologies and innovative services also deliver many unknowns for regulators. The Business Plan foreshadows expectations for the coming year with a focus on managing potential risk. Fintech may perhaps be the most important variable in the risk paradigm. According to the Business Plan:
“Technology has the potential to increase competitiveness, support innovation and efficiency, transform firms’ activities and shape consumer and counter-party access to products and services. It is important to consider the increasingly prominent role of technology and innovation in the financial sector, the impact they’re likely to have on financial services and the risks they could pose to our objectives … Financial technology (Fintech) firms are increasing in number and some of these firms want to harness data and analytics. Fintech firms are challenging traditional financial business models and are likely to play a key role in firms moving towards less capital-intensive business models, where (after the initial investment) firms benefit from economies of scale with lower ongoing costs.”
The best way to understand and mitigate potential risk is to bring Fintech closer to the regulatory process, of course. The FCA has already inked multiple bilateral agreements with regulatory counterparts around the world – all regarding Fintech. Their ties, and support, within the Fintech community underline a commitment to buttress innovation while better understanding change. Everyone understands that regulation is necessary but by engaging directly with emerging Fintech firms the agency may keep ahead of the information curve instead of reacting (or perhaps over-reacting) to an innovation not well understood.
“Competition is a much newer policy toolkit for us, and we are fairly unique around the world in having extensive competition powers.”
The larger message is the FCA embraces their purpose with consumers at the top of the list aided by their competition mandate. Rule upon regulation has never been the best policymaking approach especially in a vital sector such as financial services. Hopefully the FCA will continue its path of setting an example by embracing change – at times a Herculean task. And hopefully other sophisticated regulators will watch, learn and perhaps emulate what has been working for financial innovation in the UK.