Innovation in financial services

Speech by Christopher Woolard, director of strategy and competition at the FCA, delivered at the FinanceAsia Annual Compliance Summit in Hong Kong on 10 November 2015. This is the text of the speech as drafted, which may differ from the delivered version.

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Good morning ladies and gentlemen, it’s a great pleasure to join you in Hong Kong in such distinguished company and I’m grateful to FinanceAsia for asking me to speak.

I want to address my main remarks to the subject of innovation in financial services – a subject that financial regulators tend not to talk about that often - but before I do, I want to put my remarks in some context.

The global regulatory situation

We are at an interesting moment for financial regulation.

The crisis of 2008 gave rise to a massive mobilisation of legislators and regulators to respond to the scale and depth of the problems we faced in Europe, America and Asia. In the UK we’ve seen the recapitalisation of major institutions and a greater focus on senior management responsibility.

Now, as institutions are stabilising and we see the glimmers of recovery, governments and international bodies are rightly grappling with new questions about how to foster growth through initiatives like Europe’s Capital Markets Union.

In the background, there is the sense of the pendulum swing in regulation in motion. One of the panels later today raises the question of overregulation.

There are three dangers we need to avoid in this debate.

The first danger is we doom ourselves to repeat the mistakes of the past. A few weeks ago at the Mansion House in London, my colleague Tracey McDermott, acting chief executive of the FCA, raised the danger that we could launch ourselves into another round of regulate, deregulate, repeat.

Tracey argued instead for sustainable regulation. That not every measure introduced since 2008 would be right first time.

That a periodic recalibration of the regulatory approach is both unsurprising and healthy. But in that recalibration, we must be conscious of the lessons of the past. If we take too big a step back when things are going well, then history suggests we will fail to anticipate and prevent the problems of the future.

The second danger is we have the debate solely in terms of established business models and the risks around them.

Whilst regulators rightly focus on the risk of bad things happening in the system, we have to be conscious this can be at the cost of stifling the chance of good things emerging.

We run the risk of seeing the problems and challenges of technology and innovation without valuing sufficiently the benefits they can bring. We may be potentially too risk averse.

And the third danger is we ignore the needs of consumers and those firms that could bring the disruptive innovation we need in markets.

And the third danger is we ignore the needs of consumers and those firms that could bring the disruptive innovation we need in markets.

As regulators we need to be conscious that ever more detailed regulation can often protect established firms from competition.

Of course the balance between innovation and risk is not easy to get right.

We should not forget that Enron was voted the most innovative company in America six years in a row before its collapse.

A future-focused debate

Nevertheless, it is a challenge regulators and firms need to rise to.

The main question I want to address today is, if we know some of the dangers of this debate, how do we avoid them so we look forward and foster innovation?

One way of approaching the debate is by thinking about the outcomes - the competitive landscape - we want to see. Of markets working well. Of competition in the interests of consumers.

In the UK the FCA has been given a specific mandate to promote competition.

In common with many other conduct regulators around the world we take a risk-based approach – targeting our resources where the potential for detriment is highest. This naturally leads us to spend time on those firms that have a lot of customers or major assets flows – the large incumbents – and we understand their outlook reasonably well. 

One of the things our competition mandate requires us to do is stand in the shoes of a very different population – new entrants and challengers. 

  • How do they experience regulation? 
  • Do our frameworks provide the right kind of protection, giving customers confidence in these new businesses?
  • Do those frameworks allow enough room for innovation?
  • How do we foster an environment of genuine innovation and creativity in the midst of huge technological change, without deepening risk to unacceptable levels?

Technology and innovation in finance

Some statistics that I am constantly reminded of, but are important to mention, are that global investment in fintech tripled to US $12.21 billion in 2014 from 2013. The US takes the biggest share investment, but the most rapid growth is in Europe with an increase of 215% (year-on-year).

And total investment in London-based fintech companies so far this financial year is already higher than 2014’s total.

For the most part, this growth is being driven by huge leaps in technology, which create incredibly important questions and trends and opportunities.

  • What do we think about the emergence of ‘robo-advice’?
  • What are the benefits and risks of blockchain?
  • Can technology help solve some of the problems we face around identifying customers and combatting financial crime in a more frictionless way?

At the moment, we are seeing firms innovating across the value chain of business – and this disintermediation creates a challenge for the traditional players. Will banks simply become utilities with businesses like Transferwise, the foreign exchange website, delivering value-added services?

The reality is we are quite some way from that. Established financial services players are not going to want to go the way of the music industry over a decade ago. The sums I have talked about in fintech are dwarfed by traditional financial services.

But as we have seen with the launch of Apple Pay, there are significant players from other sectors with the ability to enter, disintermediate and change business models.

FCA response – Project Innovate 

One of the key ways in which the FCA has sought to engage with this change was by launching Project Innovate last year. As part of the Project we established the Innovation Hub. A unit dedicated to working with innovative businesses.

Project Innovate is now one year old and I wanted to share some of the lessons we’ve learnt so far.

The first lesson is ‘expect the unexpected’ – we have seen a variety of business models that often cannot be categorised easily. Be prepared for them to take different routes to market.

Let me try and illustrate this for you by talking about three different firms that requested our support over the course of the year. After talking to us, all three took very different routes to market.

We had an insurance firm, CUVVA. This is a business that aims to provide ultra-short term car insurance, allowing users to buy car insurance covering a period of a few hours, and allowing people to borrow or pool friends’ cars. The Innovation Hub helped the firm think carefully about how it approached authorisation. The firm has now been authorised by the FCA and it is currently in testing stage.

Then we had Nickle a mobile app that is attempting to modernise savings and credit in developing countries. Its aim is to foster financial inclusion and help women in particular to gain access to credit. We advised Nickle as how it would fit into the regulatory landscape, which helped it to reach some commercial decisions on how to position its business.

And the last example is Origin - Origin is a firm that is building a one-stop lending market for corporations and investors. Its platform is designed to allow investors to directly invest in corporations that need capital, and cut out the middlemen. We helped Origin understand which permissions would be required for this business model. And we gave it advice about the authorisation process. Based on this it has decided to test out its idea by partnering with a business that is already directly regulated by the FCA.

As you can see, all three businesses took three different routes with the help of the Innovation Hub.

The second lesson is to be agile and ready to work in different ways – regulators are not the innovators here. The success of Project Innovate depends on our ability to listen and adapt.

For example, we heard murmurs that firms felt there were barriers to innovation using digital and mobile solutions – we issued a call for input earlier this year and we have received positive engagement from a vast number of firms across the sector.

In another example we held a robo-advice forum last month to bring together financial services firms, technology companies and consumer groups to discuss and debate issues in the automated advice market.

Both cases are examples of us working in a more collaborative and fluid way before we act. It is strong recognition on our part that successful innovation needs firms, consumers and regulators to act in partnership.

The third and final lesson is to manage the risks pragmatically - Project Innovate makes clear we are interested in managing the rewards versus the risks. Before we support an innovative business we want to be convinced that its business idea is both genuinely innovative and has consumer benefit. But for small firms, what we don’t focus on at this initial stage is the viability of a business model. We understand that there is some trial and error for most start-ups. In due course, firms will have to meet our threshold conditions to be authorised by the FCA and sell their services to the public. But we want to foster firms at this critical early stage, not make regulation an impossible hurdle.

So what are the overall results? In the one year that we have been in operation the Innovation Hub has provided or is in the process of providing assistance to 177 firms that met our criteria.

We also had 150 firms that approached the Hub but did not qualify for assistance. We asked all the firms that approached us what they thought.

  • 78% rated their overall experience of Innovation Hub as excellent or good.
  • 84% rated the promptness of our response as excellent or good.
  • 88% rated the effectiveness of our communication as excellent or good.

But the real proof is that we are beginning to see innovative firms come to market more quickly – and some cases possibly solely – because of Project Innovate.

I consider this is a good foundation to build from, but there is more we can do.

The sandbox and the next stage of Innovate

We have also committed to make our own regulatory processes in the UK work better end-to-end for an innovative business wanting to get into the market.

So what are our next steps?

We have already announced that we think there’s more to do to improve Project Innovate.

We want to work more deeply with our fellow regulators to foster innovation. Around the world there have been similar initiatives – for example in the US there is the Consumer Financial Protection Bureau’s Project Catalyst. In Australia, the Australian Securities and Investments Commission launched its own Innovation Hub this year.

If we want competitors to grow in scale to challenge incumbents, how can we work more closely to allow firms started in places like the UK, Hong Kong, the US, Australia or Singapore expand more easily?

We have also committed to make our own regulatory processes in the UK work better end-to-end for an innovative business wanting to get into the market.

I also want to underline that we do not just think Innovate is for small firms – we want big players prepared to change business models to work with us.

And today, to mark Project Innovate’s first anniversary, the FCA will be publishing plans to implement the ‘regulatory sandbox’ the Chancellor asked us to consider as part of his spring Budget statement. Like its kindergarten namesake, the sandbox is intended to be a safe space for firms and consumers to learn and interact.

The sandbox will allow businesses to test out new, innovative financial products, services or business models without incurring all the normal regulatory consequences of engaging in those activities.

The sandbox will allow businesses to test out new, innovative financial products, services or business models without incurring all the normal regulatory consequences of engaging in those activities.

We propose the sandbox should contain a range of flexible options designed to help innovation:

  • Firms can experiment with new products and services if they have the consent of consumers.
  • Private partners could create a virtual sandbox with our encouragement – designed to allow firms to test their business models without being in the real market.
  • We could authorise one or more not-for-profit umbrella companies that could allow innovative firms to be their appointed representatives for a period of time

Undoubtedly, this is an ambitious venture. However, I believe that the sandbox could deliver a number of benefits to innovators, including significantly reducing the time it takes for innovative ideas to come to market. It may also improve access to finance for innovative firms.

In turn, our ultimate aim is that such benefits to firms should lead to better outcomes for consumers, such as more competitive products and services.

These are ideas to start the debate. We are now looking to engage widely to explore the options further.

And there will be more to come. We are in discussions to identify potential ways to support the adoption of technology to facilitate the delivery of regulatory requirements, known as ‘Regtech’.

There is an opportunity for technology to play a part in reducing compliance costs and we are committed to help finding better solutions.

Later this month, we will be publishing a Call for Input to seek views on areas of regulatory compliance and regulatory reporting which merit further attention.

At the same time we will invite a broader group of external stakeholders to share their views or express their desire to collaborate with us in the year ahead.


I would like to end by underlining that we recognise there is a challenge when it comes to balancing risk and innovation.

However, if we want financial services that offer long-term good value to consumers and competitive markets that work well, with healthy, profitable firms, then we have to embrace that challenge.

To foster innovation and do all we can to promote competition. I’m pleased that Project Innovate can play its part in that.

Thank you.