Regulating innovation: a global enterprise

Speaker: Christopher Woolard, Executive Director of Strategy and Competition
Location: Innovate Finance 2018, The Guildhall, London
Delivered on: 19 March 2018

Highlights:

• Collaboration with international colleagues has been a core part of the FCA’s FinTech story since we launched Project Innovate in 2014.
• Our regulatory sandbox is supporting firms in reducing the time and cost of getting innovative ideas to market.
• We’re increasingly hearing a demand from firms to operate internationally, so we’re working with partners from around the world to consider options for a global sandbox.
• The potential of such a project is huge – from solving global problems like money laundering to reducing the regulatory burden of compliance.

Note: this is the speech as drafted and may differ from delivered version.

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FinTech is one of those industries that we can genuinely call a global community. The international dimension of FinTech is inextricable from its success as a sector. And for the FCA as a regulator, the degree to which we seek to work with international colleagues is a defining feature of our work in this space.

In previous years, I’ve had the opportunity to talk here about our innovation work and the launch of our regulatory sandbox. We have worked with over 500 firms through FCA Innovate and around 70 in depth in our sandbox. This has been one of the largest and most complex regulatory sandboxes in the world, involving firms from Singapore, the US and South Africa, amongst other countries. So, as we look to the next stage of our innovation journey, it is only natural that international cooperation should be a key part of the picture. 

Today I’d like to talk about this vision and the role that the FCA will play in it.

Future innovation

As many here will know, our innovation story began in 2014 with the launch of Project Innovate. The purpose of Innovate was and remains to help firms tackle regulatory barriers to innovation, be it through clarifying regulatory expectations, examining our own rules or enacting policy changes, to give them space to innovate in the interest of consumers.

Central to this is our regulatory sandbox, a ‘safe space’ where businesses can test innovative products, services, business models and delivery mechanisms in the real market, with real consumers.

We were the first regulator to attempt a project of this type. And in order to make it work we had to change perceptions about the role of the regulator – for both firms and ourselves. We had a big job to do to ensure firms found us easy to work with and knowledgeable about the challenges they face in bringing new products to market.

The shift in mindset that was required was significant too: from the traditional regulator’s standpoint of ‘what is the risk?’ to asking ‘what is the risk of not doing this?’ And when we asked ourselves that question we found that the risk of not opening up markets to innovation was bigger than the risk of taking that leap.

The sandbox has been as much an experiment for us as it is for the firms themselves. But, I have to say, for a calculated risk, this bet has really paid off. Since we launched the sandbox in 2016 we have supported firms in reducing the time and cost of getting innovative ideas to market. In fact, 90% of firms from our first round of applications have gone on to market, with many firms finding it easier to get funding as a result of participating in the sandbox.

We’ve seen take-up by large firms as well as start-ups, who may not have had the confidence to try new approaches without the security of the sandbox. And through sandbox firms being closely supervised in their test phase we’ve learnt an enormous amount about how new technologies are being applied.

So we know this approach is working. The question is, is it enough? Over the last couple of years, we’ve seen a trend emerge which has become impossible to ignore. Increasingly we’re hearing from firms a demand to operate globally, to grow at real scale and pace. This would involve working with other regulators across the globe to conduct tests at the same time.

Through the sandbox we’ve seen 30 applications from international firms and have gone on to support 11 of them – many of which are also in other countries’ innovation programmes. It’s clear which way the wind is blowing.

Nor is international collaboration around FinTech new to us. Over the last few years, we’ve signed ten cooperation agreements with eight different jurisdictions, allowing us to share market trends, collaborate on projects and refer innovative firms across markets.

But currently there is no joint sandbox programme with other regulators for firms to participate in. Such a project represents new territory. Breaking new ground requires an element of risk, not something, as I’ve said, that regulators are generally comfortable with. But our whole history with Innovate has been about doing things that regulators historically haven’t done.

To face those risks, we have to ensure we have the right controls, all the while bearing in mind the risk of not acting. So we’re up for the challenge.

Naturally, though, we want to do our homework. That’s why last month we invited stakeholders to share their views on what a global sandbox could look like. The responses – from regulators to start-ups, challengers to large firms, trade bodies to think tanks – make for fascinating reading.

As expected, there is lots of interest in the idea of cross-border testing; in the benefits this could bring, such as reducing cost and complexity, and accelerating expansion into other jurisdictions – especially for smaller firms who are keen to expand internationally.

In terms of the jurisdictions that respondents are keen to see included, the US featured high up the list. South America, Australia, Hong Kong, Singapore and Europe also made an appearance. African countries, like South Africa and Kenya, also featured in a number of responses. This should come as no surprise when you consider how new models of banking have grown up there.

When it came to how a global sandbox might work in practice we saw some really creative suggestions coming through – from a ‘global dictionary’ which covers data needs across different countries to a joint mission statement from participating regulators with agreed criteria and consumer safeguards.

And overseeing it all, it was suggested, could be a ‘college of regulators’ – a consortium of representatives from participating regulators, something that corresponds with our own thinking.

So, what do we think?

1. We should be practical. Establishing a global sandbox is an immense undertaking and we have to be realistic about the task at hand. In some quarters, there could be an aspiration for global standards. The logic is clearly there, but my strong suspicion is that it would take twenty years to negotiate and in a fast-moving market would be nineteen years and six months out of date when we got there.
2. We should work with and through international bodies where we can – we are already working closely with international colleagues in IOSCO, for example. To avoid running before we can walk, we might want to start with those jurisdictions which already have established sandboxes or innovation hubs.
3. The model should allow some room for us to experiment with what works. So we could see a range of sandbox tests. For example, a single test in one country collecting data for multiple interested regulators. Or simultaneous testing in more than one country. 
4. The membership should be flexible. We should not assume that all regulators would be engaged in every test, although we should, of course, share knowledge and learning widely. 
5. Most of all - the key to all of this is collaboration – this has to be a joint effort across international regulators, not a UK global sandbox.

Because, clearly, we can’t do this alone. While we may be the ones kicking off the discussion, we won’t have much success if we’re just talking to ourselves. So now is the time to bring fellow regulators around the world into the conversation. In fact, collaboration will run through the next chapter of the UK’s FinTech story like a stick of rock.

Later this week we start work with interested regulators, including colleagues across Europe, the US and Far East, on a blueprint. So there’s real momentum behind this and we hope that before long the ambition of a global sandbox will be a reality.

Global problems and solutions

Now, participating in a global sandbox would represent a truly momentous step forward in the UK’s FinTech journey. But we think it could do a lot more than just allow innovators to test their ideas. One option we want to explore is the power of this sandbox to solve global problems.

In my conversations with colleagues I hear them grappling with many of the same challenges as us, whether they’re from Sydney or Singapore. Can we use the global sandbox to tackle the questions occupying the minds of the international community, questions which have potentially huge ramifications for financial services and beyond?

I want to give two examples.

First, the anti-money laundering effort – after all, controls can’t be effective if there’s fragmentation. This is an area where we all have skin in the game.

The UN estimates the full global scale of money laundering to be $1.6 trillion annually[2]. It’s in all our interests to apply our joint expertise globally in tackling it. That’s why, in May, we will be bringing together international partners from the US, Europe, Australia, Japan and Korea in a TechSprint which will focus specifically on developing solutions to the challenges of money laundering, financial crime and terrorist financing. This will be the fifth TechSprint we’ve held.

These events draw on the skills of software developers, data scientists and subject matter experts. We work together in cross-industry groups to develop real, tangible solutions to critical problems in financial services. And they create real results. From previous techsprints we’ve seen commercial partnerships established between and several large banks will take regulatory reporting into a production environment.

Our ambition for the AML event is that it serves as a first step in establishing a deep international dialogue around the role of technology in tackling money laundering and criminal finance.

So we see each TechSprint as a real catalyst for change, not just a talking shop.

Computer says yes

For my second example I want to move from the economic and criminal burden of money laundering, to the regulatory burden of compliance. This, the accuracy of regulatory reporting, and the resource and time taken to achieve it, is another field where our paths cross with those of international regulators.

Monitoring misconduct can be like trying to find a needle in a haystack – no matter which jurisdiction you’re operating in. But the advances of the last few years have opened up a whole new world of possibilities, which could see the regulatory burden become more effective and the costs shrink considerably.

One area where this could be applied to great effect is around the way firms interpret our regulatory requirements. What if, requirements could be expressed in a language that could be understood by machines? Not for everything, but for many reporting requirements. We know that the technology exists.

At our TechSprint on regulatory reporting last year, we saw for ourselves that it is possible to take a regulatory requirement contained in our handbook and turn it into a language that a machine can understand. And from that language, machines can respond to the requirement by effectively pulling the necessary information direct from the firm[3]. Not in months, but in seconds. In our sprint, 12 seconds to be precise.

The potential benefits of this are huge. If regulatory requirements can be executed by machines, a firm’s compliance with that obligation will be more consistent, meaning we receive more timely, better quality data. It also means that firms’ implementation of our rules would be faster and more efficient, significantly reducing costs but without diminishing the benefits for markets or consumers.

We can’t get ahead of ourselves here. What we tested end to end at the TechSprint was a very narrow example of this and we can’t flick a switch and suddenly have a regulatory regime which is entirely based on machine executable rules.

But what we are exploring, is could we implement a new requirement using this method. We will be conducting further research on this over the next few months and hope to start to be able to put this into practice beyond that.

Conclusion

Three and half years after we launched Project Innovate and our belief in the transformative role of technology in improving outcomes for consumers has not wavered. In fact, our ambitions are greater than ever before. The opportunities are there for the taking – and we are poised to reach out and grab them with both hands. But we can’t do it alone.

Finance is a truly global sector and it only makes sense that we tackle the challenges of our age together. So fostering innovation and collaboration will be absolutely central to what we do next. And we hope you’ll join us on the next stage of the journey.