Speech by Christopher Woolard, Director of Strategy & Competition, FCA, delivered at the Finextra Future of Money event. This is the text of the speech as drafted, which may differ from the delivered version.
Historically, financial regulators have had to worry about risks – principally the risk that something bad may happen from a prudential perspective. We still do, and quite rightly so.
But this approach can encourage a mind-set where it is seen as somehow safe if the same firms sell the same tried and tested products.
Since our creation in 2013, the Financial Conduct Authority was designed to be a bit different. To have a stronger focus on the consumer. And perhaps most obviously we have a statutory objective to promote competition in the interest of consumers.
To some degree, promoting competition means worrying about the risks that some things might not happen: that new products might not be launched, that new players won’t join the market, or that there won’t be new choices for consumers, or better value.
In October 2014 we set up the FCA’s Innovation Hub. This is a new team that provides direct support for innovators.
Disruption - particularly disruptive new entry – is a key part of promoting competition. But financial regulatsion can be complex, and deeply traditional in its approach. That’s why in October 2014 we set up the FCA’s Innovation Hub. This is a new team that provides direct support for innovators.
What the Innovation Hub does
The Innovation Hub does two main things.
First, it helps innovators navigate regulation. For example, some developers might be working on an app to help consumers save. They might need help in understanding whether they need to be authorised. Or it could be a tech firm trying to sell to banks. If the solution is innovative it may not be clear how banks can use it and stay compliant. So we can help the tech firm understand how our rules would apply.
The second strand is changing policies or processes where this would encourage useful innovation. Some of this feeds through from the first strand of work – helping innovators. But we also engage with the fintech ecosystem to identify barriers to innovation.
How to get support
If firms are interested in our support, we have a simple point of contact on our website. We’ll ask you a few questions – we will need to know some more about your proposition – but that can be in the form of a pitch deck you might already have prepared.
We are not too worried about the size of the firm. Our main tests are: Do we think this is a genuine innovation? And if so, is it likely to be in the interest of consumers?
Numbers and statistics
Since October, we received 170 requests for support. We provided support to just under half of these firms. For the vast majority of requests, we follow up by phone or in person. And we ask all firms what they thought about our service. How useful was it? Was it prompt?
83% of firms that responded rated their overall experience with the Hub as good or excellent. 89% thought the promptness of our response was good or excellent.
We also held two seminars on how to become authorised for start-ups. We will soon announce more dates in this series of events.
Examples of firms we helped
I also want to talk about two businesses we have supported. We treat all approaches in confidence, but I can give these examples because we have explicit permission to do so.
If you move to the UK from abroad, you have what is called a ‘thin credit file’. This can be a problem for opening a bank account, or even getting a phone contract. This issue also affects recent graduates, or some people who have recently been through a divorce.
One business taking aim at this is Aire. They told us they want to empower consumers to build a picture of their creditworthiness. Consumers themselves can provide information about their academic background, salary, or even their LinkedIn profile. Aire believes that these metrics will help them paint a richer picture of consumers’ ability to repay.
For financial providers, this could potentially unlock an unserved market. For the consumer it could solve a real headache. We helped Aire understand whether their service is a regulated activity. And we are now supporting them as they prepare their application for authorisation.
Another example - if you are a business raising finance though bonds, you need to deal with a lot of middlemen. Each takes a cut, and fees add up. Also, for smaller wholesale investors, taking part in a bond issue is difficult. Often you need an established relationship with an investment bank as a starting point.
Origin is a firm building a one-stop lending market for corporations and investors. Their platform is designed to allow investors to directly invest in corporations that need capital, and cut out the middlemen.
Origin think their platform will enable a broader range of institutional investors to take part in a bond issue. This should enable bond issuers to get a fairer price for their bonds, and pay lower fees.
We helped Origin understand which permissions would be required for this business model. And we gave them advice about the authorisation process.
These are just two examples of the businesses we have supported.
It’s not for us to say whether firms we support will succeed or fail. Many start-ups do fail. This is a natural part of the innovation cycle. What we look for from innovators is the potential to bring benefits to consumers and a need for support in navigating regulation.
We learned a lot over the past six months. We got feedback on our ways of working and adapted accordingly. We also got some great suggestions on what more we could do to support innovators in future.
One thing firms told us is that they want easier ways of testing out products or services with customers. They want to do this before committing to the time and expense of becoming fully authorised. This approach is known as a regulatory sandbox, and it was recently announced in the Budget.
This is how it works in other sectors of the technology industry, or in parts of the pharmaceutical industry. You create a product; you trial it with some consenting customers; and if it works, you ask for more funding. But our regulatory regime makes this approach difficult.
If you are carrying out a regulated activity, you need to become authorised. Only then can you sell your product to consumers. There would be risks if we changed this framework. The question for us is how do we allow for experimentation while still ensuring an appropriate degree of consumer protection?
There may be ways to work within the existing framework or regulation. Many businesses choose to become Appointed Representatives of other firms. Some European Directives contain limited network exemptions that are helpful for trialling new services.
We want to explore how we might draw on all these options and develop a new approach that could support testing of innovations at an early stage.
I will also sketch out some other ideas that are currently at an early stage. We will work these into more concrete proposals over the coming months.
When we set up the Innovation Hub, we developed the ‘informal steer’. This allows the Hub to give innovators substantive comments quickly, although they rely on them at their own risk.
One thing firms told us is that they want easier ways of testing out products or services with customers.
Previously, to get our view on a regulatory question, firms had to request individual guidance. This is a lengthy and formal process. But most of the time, innovators need something less formal. They want to get our thoughts, and they want them quickly. The informal steer allows us to do just that.
The firms that came though the Innovation Hub really appreciated this tool. So, we are considering trialling it in other parts of the FCA.
We also want to gather more information to support our second strand of our work. Changing policies and processes that are barriers to innovation.
The way in which consumers engage with financial services is changing rapidly. Digital and mobile channels are making a huge impact. This is not evolution – it is revolution. We think there is real disruptive potential in the switch to digital channels and more specifically, use of mobile.
So in the autumn we will issue a Call for Input, asking a broad audience about examples of regulatory barriers to innovation in digital and mobile. This will help us understand where we need to make changes, or simply where we need to communicate our approach better, because we think there are some barriers to innovation grounded more in perception than reality.
The Innovation Hub is six months old. The engagement we have had with the FinTech ecosystem has been fantastic.
We want to continue this, and to develop an approach to innovation that works for consumers and for innovators.