Speaker: Christopher Woolard, Director of Strategy and Competition
Location: Grange Tower Hill Hotel, London
Delivered on: 20 July 2016
Key points:
- The FCA’s work on innovation is integral to our duty to promote competition in the interests of consumers.
- Since the launch of Project Innovate in October 2014, we have provided support to nearly 300 firms who presented innovative ideas that were in the interests of consumers.
- We have a particular interest in working with those involved in developing technologies to improve regulatory reporting and data sharing - so called 'RegTech'.
It’s a pleasure to have the chance to speak here today about the critical role innovation and specifically RegTech play in the FCA’s agenda.
We see our work on innovation as integral to our duty to promote competition in the interest of consumers.
Disruptive innovation has the potential to shake incumbents and change the business models in a market. We see developing a more diverse, innovative financial system as a crucial aspect of the competition agenda, delivering consumer benefits and more efficient markets.
Innovation remains at the forefront of our agenda having been identified in our Business Plan as one of the FCA’s priorities for 2016/17. Today I want to talk about three things:
- our overall approach as a regulator to innovation in financial services through Project Innovate
- RegTech - how innovation can help in fulfilling regulatory obligations
- and finally a few words on our international approach to innovation
In particular, I will spend most of my time talking about the document the FCA has published this morning on RegTech and what that means for our approach to regulation.
Before I go on to talk a little about some of the things we are doing as a regulator to foster innovation, I need to address what may otherwise be the elephant in the room, and this is of course the EU referendum result.
The longer-term impacts of the decision to leave the EU on the overall regulatory framework for the UK will depend, on the relationship that the UK seeks with the EU in the future.
We will work closely with the Government as it confirms the arrangements for the UK’s future relationship with the EU.
A lot of our current domestic financial regulation derives from EU legislation. This regulation will remain applicable until any changes are made, which will be a matter for the Government and Parliament.
It is important to stress that firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.
Similarly, consumers’ rights and protections, including any derived from EU legislation, are unaffected by the result of the referendum and will remain unchanged unless and until the Government changes the applicable legislation.
At the moment there are clearly a number of issues to be worked through by the authorities. We will play our part in that, providing technical support to the Government where needed, but clearly there is nothing more to say for the moment as a regulator.
The one point I would stress though, is that as we work through those issues our commitment to driving competition and innovation remains unchanged.
Project Innovate
Since the launch of the FCA in 2013 we have looked to foster competition and new entry, for example by working with colleagues at the Prudential Regulation Authority to streamline the process to become a new bank.
Our biggest commitment to innovation though was to found Project Innovate in October 2014. Financial regulation can be complex, and deeply traditional in its approach. That’s why we started Project Innovate; to support both regulated and unregulated businesses to bring innovative ideas into financial services markets, where these ideas are in the interests of consumers.
We have not relaxed our standards; rather we want to support new firms as they look to enter the market or established players break with tradition.
Project Innovate has twin aims: on the one hand providing direct support to innovators; and on the other, and just as importantly, using the feedback we get to take a good look and to improve our own policies and processes where appropriate to ensure that we are not creating barriers to competition.
In the first year we supported 177 firms – just 8 months later that number has increased to nearly 300.
I am extremely proud of the work we have done but we need to do more; Project Innovate is after all as much a learning process for us as it is for the industry.
One of the ways we are developing Project Innovate is through the Regulatory Sandbox – launched in May this year, this was a bold and complex project for any regulator to undertake.
The Sandbox allows innovative firms to test out new business models in a controlled environment where consumers are suitably protected, but without incurring all of the normal regulatory consequences of engaging in those activities.
Our intention is to facilitate new products and services coming to market, which might otherwise, for a number of reasons, have struggled to progress beyond the concept stage.
The Sandbox offers a range of options for eligible firms:
- a tailored authorisation process (for restricted authorisation) for new firms in the testing phase
- individual support for firms testing ideas that do not easily fit into the existing regulatory framework
- and in some cases specific waivers or ‘no enforcement action’ letters to provide firms with a safe space to test new ideas
There has been a really significant response to our first period for applications across the full range of financial services and from both large and small firms. We are really pleased with the range and scale of ideas we have seen – so much so that we will be dedicating more colleagues to work on this - and we will be saying more in the coming weeks.
RegTech Call for Input
I want to turn to our RegTech work - and I am delighted to announce today the publication of our findings from our RegTech Call for Input.
Listening to both the technology and financial services industries, academics and consumers has been a key part of developing our approach to RegTech.
Having had some initial conversations we issued a Call for Input in November 2015.
We asked:
- what the industry thinks about RegTech and what level of importance is placed upon it?
- where might RegTech solutions be able to improve the efficiency or effectiveness of regulatory reporting and compliance?
- what role should we, as the regulator, play?
- what are the views on the challenges, risks and any barriers (regulatory or otherwise) which were seen to be prohibiting the development and adoption of RegTech?
How important is RegTech?
We were extremely pleased by the level of interest and quality of feedback, with over 350 responses from a wide spectrum of respondents more than 60% of whom were in board-level and senior leadership roles.
In part, that reflects the fact that billions of pounds are spent every year on the business of regulation. Tens of thousands of people in the UK alone are employed in compliance seeking to implement anti-money laundering controls. Much of that is incredibly necessary to create a safe, secure financial system.
But we have to keep asking ourselves can it be done better? Where can technology help us make better, more efficient and effective choices? High costs and inefficient processes can be both a barrier to competition and result in costs passed to consumers.
We have a particular interest in working with those involved in developing technologies to improve regulatory reporting and data sharing – both between firms and between regulated firms and the regulator – and in making our Handbook more accessible.
Let me give you an overview of the four main kinds of responses we received about what this space could look like in the future. I think it should be no surprise to this audience to hear about technologies that are often spoken about being used between firms and consumers to make the interaction between the regulator and regulated easier and more effective.
RegTech solutions and how they might be used
- First, making the business of complying with reporting requirements simpler - technology that allows more efficient methods of sharing information (for example: alternative reporting mechanisms, shared utilities and online platforms).
- Second, technology that drives efficiencies in regulatory compliance by seeking to close the gap between the intention of regulatory requirements and the subsequent interpretation and implementation within firms. For example, we have seen a range of semantic technologies and significant enthusiasm for robo-advice style models to help firms understand their regulatory responsibilities.
- Third, technology that simplifies and assists firms in managing and exploiting their existing data, supporting better decision-making and finding those who are not playing by the rules easier. This includes new data analytics technology, real-time compliance monitoring and trade surveillance systems.
- Finally, technologies and innovations that allow regulation and compliance processes to be delivered differently and more efficiently. Here we see significant interest in distributed ledger technologies, automated compliance systems, machine-readable regulation and expanding use of biometrics for identity verification purposes.
Challenges and risks
Respondents identified a number of potential barriers or impediments to innovation and the adoption of RegTech.
Some of these concerned regulatory uncertainty, inconsistencies between different national regulatory regimes and a lack of understanding about regulatory requirements by some new technology providers.
Others pointed to the complexity, scale and diversity of legacy infrastructure and existing systems within financial services firms, making the implementation of new technologies challenging.
Firms (and sometimes regulators) are naturally risk averse and tend to prefer adopting proven technologies. Respondents thought this might be alleviated by the regulator being more pro-active in encouraging the adoption of RegTech solutions.
Finally, some technology providers, notably start-ups and those seeking to offer services to financial services firms for the first time, told us about the challenges of getting access to such firms.
What role should the FCA play?
We have heard the message that there is strong interest in the regulator playing an active role to unlock the potential benefits of technology innovation arising in the FinTech community, specifically:
- Respondents asked that we work with industry to help define common standards and guidelines.
- To increase our engagement and collaboration with the RegTech community, using our convening powers to help bring market participants together to work on shared challenges.
- To provide early views on where we feel the industry should focus its efforts and attention.
- Finally, and I believe this is a difficult ask, respondents also asked that the FCA consider playing a role in approving or certifying technology solutions that meet certain regulatory criteria. We need to reflect carefully on this one, as there are significant complications and challenges, not least that we lock in standards that become rapidly superseded. A better role may be for the regulator to think how we foster solutions emerging from the market.
Listening to those messages, we want the FCA to be a regulator that:
- is fully engaged with the FinTech community and keen to improve the conversation between the regulator and the regulated.
- encourages and supports the use of innovative technology, allowing flexible, efficient and effective innovation; and acts as a catalyst for further competition within the FinTech sector
- provides an environment where new and emerging risks can be identified and managed effectively
- recognises the importance of both regulated firms and technology vendors understanding the regulatory position, and we can also play a role in aiding that understanding
- promotes an industry where consumers have the appropriate level of protection and suitable access to the benefits of RegTech
What have we been doing to address these opportunities and challenges?
Those should not just be fine words.
Let me give you two quick examples of some early work we are doing here.
We have already recognised the opportunity to bring market participants together to work on shared challenges and nudge them to address problems we are interested in for the benefit of regulated firms and consumers.
This led to our TechSprint event in April this year - more commonly known as a 'hackathon' - we believe this was a global first for a regulator.
This two day innovation event involved a cross-section of financial services providers and technology companies with a known interest in how technology can help to address some of the intractable problems and challenges faced by consumers, particularly those who might be elderly, disabled or financially excluded, in accessing financial services.
Teams were given 48 hours to come up with a prototype solution: facial and voice recognition with speech playback, multi-lingual capability and simplified command buttons featured heavily.
The event was very successful, providing input to our own thinking on access published in May; and three of the ideas are being explored commercially as possible products to bring to market.
We are planning another event for later this year that is likely to focus more specifically on the interface between the regulator and regulated firms - and intend to continue to use TechSprints as one of our regulatory tools going forward.
Anti-Money Laundering (AML), FinTech and 'De-Risking'
AML is another of the FCA’s priorities for 2016/17 - we want the UK financial system to be a hostile sector for money launderers.
However, it is equally important that unintended consequences of AML regulation are minimised and that firms’ AML controls do not unreasonably exclude consumers and organisations from using financial services, or FinTech firms from providing those services.
Many of the criticisms of the AML regime, and the burdens it imposes, relate to the due diligence checks – commonly referred to as Know Your Customer checks, or 'KYC' - and there is a perception that anti-money laundering checks like this are a barrier to business, innovation and, ultimately, competition.
Today’s AML regime was mainly developed in the 1990s, and while it does recognise digital identity, the way that many firms have put it into practice can make it feel paper-based.
This is an area that concerns us and we would like to see innovative methods being deployed by financial services firms.
As the regulator we are technologically neutral. We are not wedded to any one technology or approach as being the sole way of working. We certainly do not endorse any one provider or product. We are interested in what works.
We want to see what can be done to make AML processes simpler, slicker and more cost-effective for both firms and consumers.
We are currently at the early stage of scoping some work to see what technological solutions might be exploited for this purpose.
We envisage this including commercially-available tools, government-backed identification initiatives, and technology developed by firms in-house. Some of the objectives are likely to include:
- streamlining customer due diligence checks
- strengthening anti-impersonation checks
- sharing customer due diligence data between institutions
- monitoring transactions for suspicious activity
International collaboration
Finally, I wanted to say a few words about our international activity. FinTech and RegTech are happening on a global stage.
We were amongst the first financial regulators in the world to look put innovation and technology at the forefront of its agenda. For some aspects, we are genuinely world-first.
If we want those benefits to competition and innovation in the UK, we have to do what we can as a regulator to ensure UK firms can grow in scale globally and the most innovative firms come to the UK.
A simple way we can do that is through closer international co-operation. Already this year we have signed international cooperation agreements with both the Monetary Authority of Singapore (MAS) and the Australian Securities and Investments Commission (ASIC).
These agreements allow us to:
- refer innovative businesses seeking to enter the other’s markets
- provide support to innovative businesses before, during and after authorisation to help reduce regulatory uncertainty and time to market
- support innovative businesses to grow and scale
We have a number of other agreements we are pursuing and I hope to be able to say more very soon.
Conclusion
To conclude, we started Project Innovate just under two years ago.
We have learned, and will continue to learn, to build on the successes we have already had. But as I said at the start, what I want to make clear to you today is that our commitment to promoting competition and innovation has not changed.
So long as there are firms – whether they’re established or new to market – bringing new proposals to us, to improve the financial services market and benefit consumers, we will absolutely continue our role in helping to foster world-class financial innovation in the UK.