Speech by Christopher Woolard, Director of Strategy and Competition at the FCA, delivered at the BBA FinTech Banking Conference.
Speaker: Christopher Woolard, Director of Strategy and Competition
Location: Allen and Overy, London
Delivered on: 22 September 2016
- Project Innovate's aim has been to provide innovators whether large or small with some support to navigate the regulatory system, to reduce the barriers to innovation whilst maintaining the same standards of regulation and consumer protection. A few days ago, we passed the 300 mark in terms of firms assisted.
- Interest in the Sandbox has been high and total applications have far exceeded our expectations. Of 69 applications, we have accepted 24 to develop towards testing and all come from a wide range of sectors including retail banking, insurance, advice and profiling and IPO.
- The second regulatory innovation is the Advice Unit, in which nine firms were successful out of the 19 applications we reviewed in the initial tranche. And of these nine firms, eight are established financial services, who want to bring automated advice to the market at scale.
- We will look to encourage innovation and adoption in technology through our RegTech work, working collaboratively to unlock the complexities and costs of regulation in new and creative ways.
Note: this is the speech as drafted and may differ from delivered version.
This is an exciting time for the FCA and our work around innovation in the financial services sector.
It is almost two years since we launched Project Innovate, and in that time we’ve seen the work to fostering innovation yield real results. Two of the clearest examples of this are the Regulatory Sandbox and Advice Unit. I also want to mention our work on regulatory technology - regtech.
Over the past year my colleagues and I have spent quite a lot of time talking about all three. The interest we’re receiving globally is huge, so it would be easy just to give an update on them, and of course I will in a few minutes.
But with so much activity underway, I'd also like to just take a step back and just remind everyone of the logic for why we are doing this work as a regulator, to reflect on some of the lessons we have learnt so far and what we hope to achieve through our continuing commitment to competition and innovation.
The FCA’s role in promoting innovation
Few would dispute that technological change is reshaping the delivery and consumption of financial services and products. According to the BBA’s own research, nearly 14 million banking apps were downloaded in 2015, a 25% rise on 2014.
With the landscape in which we operate changing at pace, we at the FCA faced a choice: do we shy away from the challenges technology brings and cling to the status quo? Or should we seek to use our unique position to harness the power of innovation for the good of consumers and markets?
Well we chose the latter, and with good reason.
We have an overarching statutory objective as a regulator to make financial services markets work well and three key strategic objectives to help guide us to what that means, based on market integrity, consumer protection and promoting competition. Our duties apply both across retail and wholesale. We do not see innovation as limited to just certain parts of the financial services market.
When we look across the landscape in financial services we can see many potential common competition issues: markets with a few major incumbents, difficulty with shopping around and pricing and products that can be complex to understand.
It is almost two years since we launched Project Innovate, and in that time we’ve seen the work to fostering innovation yield real results.
In such environments the incentives to innovate in the interests of consumers may be limited. The challenge for the regulator is how can we promote competition, free up the forces that drive innovation in the interests of consumers, but without falling into the trap of picking winners. There are a number of ways we can get that competition and innovation into the market. Most dramatically a new challenger coming in and rapidly taking market share. Alternatively, multiple small disruptors pushing larger firms to change their business models.
But we also recognise the developing trend within the banking industry towards innovation and collaboration. SAP’s recent global banking survey on digital transformation highlighted that six in 10 global banks are open to partnering with fintech firms. In this sense, greater competition does not just mean new fintech start-ups, it also means incumbent firms developing new innovative services in the interest of consumers, and in some cases greater competition brought about through a start-up and incumbent firm collaborating.
That is why I want to reiterate to you all today that Project Innovate is about working with incumbent firms to develop new innovative ideas as much as it is providing support to start-ups. If there are specific challenges incumbent firms face when it comes to competition and innovation, we would like to hear about them to inform our future activity.
Traditionally financial regulators around the world have tended to look upon disruption and innovation with suspicion, at best a risk to the prudential security of the models of existing incumbents. In the UK, both we and the PRA have begun to change that analysis and focus on the long term benefits for the strength of markets of greater competition.
We want UK firms to feel that both established players and start-ups can bring new ideas to market, invest and be able to grow.
Alongside native business, we also want to see the best firms from around the world coming to the UK. Consumers benefit both directly (from products previously available elsewhere but not in the UK) and indirectly, as firms seek to provide innovative responses to their new competitors. There are clearly wider advantages to the wider UK economy. And we want to see home-grown challengers able to grow scale by expanding overseas too. This is business as usual for us, both before and after 23 June.
The FCA’s response
That analysis has driven us to do a number of things under Project Innovate.
The aim of Project Innovate has been to provide innovators whether large or small with some support to navigate the regulatory system, to reduce the barriers to innovation whilst maintaining the same standards of regulation and consumer protection. A few days ago, we passed the 300 mark in terms of firms assisted.
Innovate has also given us a deeper understanding of what is a fast moving area of the market, none more so than in the cutting edge of the Sandbox. It is a learning journey for both firms and us as the regulator.
We have an active international strategy. Earlier this year we signed agreements with regulators in Australia, Singapore and The Republic of Korea. These are already bearing fruit with the first firms using these to smooth a path to market and we hope there will be more such co-operation to come.
This broad experience – both international and domestic – has taught us a huge amount and we’re pleased to be able to share our knowledge with peers so they in turn can encourage innovation in their spheres of influence.
But one of the biggest take-aways for me has been the sheer demand for a dialogue between innovators, whether new or established firms, often about quite simple aspects of regulation as well as the most advanced areas of thinking like the Sandbox. And how can we, as a regulator, keep that channel of communication open.
Update on the Sandbox
Of 69 applications to Sandbox, we have accepted 24 to develop towards testing.
So let me turn to the Sandbox. As many of you here today will know, this was a first for regulators worldwide. It underlines our deep commitment to innovation and our willingness to think outside the usual regulatory parameters.
It was to act as a safe space for firms to test new ideas without incurring all of the normal regulatory consequences, and we opened for the first round of applications in May.
Interest has been high and total applications have far exceeded our expectations. Of 69 applications, we have accepted 24 to develop towards testing, which met the Sandbox eligibility criteria, leading us to expand our team to meet demand. We have also offered assistance via Project Innovate or other colleagues to 40 of the applicants, in some cases to prepare for the next cohort of the Sandbox.
The demographic of applicants is diverse, covering a range of geographies, both domestic and international, including Singapore, Denmark, USA and Canada.
The range of sectors covered was also broad: from the applications accepted, four came from retail banking, four from insurance firms, three covering advice and profiling and three related to IPO. There was also one application each for digital identity, disclosure and the mortgage sector.
They also came in all different sizes – including from challengers and incumbents. We have also seen incumbents and start-ups create partnerships – the incumbent bringing established systems, distribution channels and customers and the start-up bringing new technology and fresh insights.
Lastly, seven applications came from payment firms – including blockchain firms.
I have said before that the FCA does not view blockchain as a panecea, but at the same time although still in its relative infancy, the development of Distributed Ledger Technology (DLT), and its application as blockchain, has the potential to offer genuinely innovative solutions to financial services.
DLT presents real opportunities in the regulatory space, as my colleague Megan Butler highlighted at the BBA Financial Crime and Sanctions conference on Tuesday. Opportunities such as helping firms meet Know Your Customer or anti-money laundering requirements more efficiently. But there are a number of issues to be considered. For example, how do individuals gain access to a distributed network and who controls this process? What data security exists for users?
We are engaged in discussions with government and industry on these issues.
As with all new technology, the development of DLT will be an iterative process. Our current thinking around what it can do will undoubtedly adapt and change as research and experimentation continues. So we will continue to monitor development of this technology, while remaining alive to any future risks it may pose.
The range of Sandbox applications we have seen is truly impressive, and we are really pleased with the response.
Now that we’ve finalised the list of successful applicants, we are in the process of agreeing details of testing, timelines and consumer safeguards. We will update on this over the coming weeks and publish a full list of all the firms taking part in trials.
As I said at the start of this speech, ultimately our interest in this space relates to our competition duty: innovation creates competition, and greater competition means better outcomes for consumers.
We’re committed to supporting that virtuous cycle, now and for the long term.
We will be opening for a second round of applications in mid-November, where we hope to see the same level of diversity as the first cohort.
This is as much an experiment for us as it is for firms. It is the first time we are allowing firms to test in this way, so naturally some pilots will go better than others. We will play back these lessons learned over the course of the next year.
Update on the Advice Unit
The Advice Unit is open to firms of all shapes and sizes – as long as you meet the eligibility requirements, you are welcome.
The second regulatory innovation we’ve been dedicating our energy to is the Advice Unit, which also opened for applications in May this year.
The Advice Unit was born out of the Financial Advice Market Review, or FAMR. The Review, conducted jointly by the FCA and the Treasury, explored the barriers preventing people from accessing financial advice and set out recommendations for overcoming these challenges.
Technology was identified as a means of giving consumers more access to affordable advice, so, as part of Project Innovate, we established the Advice Unit as a way of supporting firms developing automated models which seek to deliver lower cost advice.
As with the Sandbox, the Advice Unit is open to firms of all shapes and sizes – as long as you meet the eligibility requirements, you are welcome. That applies to small firms as well as big ones.
Having now assessed the applications, we can announce that nine firms were successful out of the 19 applications we reviewed in the initial tranche. And of these nine firms, eight are established financial services, who want to bring automated advice to the market at scale.
Firms who were not successful have received feedback to help them understand why they did not meet our eligibility criteria, and have the option to reapply when we open our next cohort.
The nine successful firms have begun the process of engaging with the Advice Unit, who will seek to provide regulatory feedback on the automated advice models they are developing.
As I mentioned earlier, there will be lessons for everyone – from regulators to firms.
With that in mind, we aim to share publicly what we’ve learnt from the Advice Unit’s interactions with firms, in order to give greater clarity to the industry on how to take an automated advice model forward.
We will begin to publish these resources on the FCA website for all firms developing automated advice models in early 2017.
Last but not least I wanted to say a few words about regtech.
I’m sure I don’t need to tell you that billions of pounds and large numbers of staff are dedicated to the business of regulation and compliance.
While the need to create a safe, secure financial system can be in no doubt, we must ask ourselves if there is an easier, more efficient way for firms to fulfil some of their regulatory responsibilities.
High costs and inefficient processes can be both a barrier to competition and result in costs being passed on to consumers, so it is up to us to explore the role of technology in helping us make better, more efficient and effective choices.
RegTech has the potential to free up large sums of operational and capital expenditure which are currently spent on compliance. This potentially increases firms’ capacity to innovate.
This cause and effect helps to drive the UK economy and maintain the vibrancy of the UK, as a major global financial centre.
That is why we will look to encourage innovation and adoption in technology through our RegTech work, working collaboratively to unlock the complexities and costs of regulation in new and creative ways.
We have already recognised the opportunity to bring market participants together to work collaboratively on shared challenges to assess and solve problems at the regulatory interface.
We held our first TechSprint – more commonly known as a ‘hackathon’ – in April this year. The two-day event focused on increasing consumers’ access to financial services, bringing together a cross-section of financial services providers and technology companies to develop prototype solutions to overcome seemingly intractable access barriers.
Yet again, this was a global first for a regulator, with three of the ideas generated at the event now being explored commercially as products to bring to market.
We are now planning to hold a second TechSprint event later this year on the theme of ‘unlocking regulatory reporting’. This might not be as glamorous as some projects but the costs to firms and to consumers in due course, are very significant indeed, let alone the contribution that could be made to enabling us as regulator to do a better job.
We will continue to use TechSprints as one of our regulatory tools to explore solutions to other challenges and act as a catalyst for change that helps to unlock the potential benefits of technology innovation.
So, as I hope is clear, the FCA is genuinely committed to harnessing the power of innovation in the interests of consumers. And the work that we do is focused on delivering better outcomes for the markets we regulate.
It’s been almost two years since we started Project Innovate. In that short time we’re seeing attitudes shift. With the pace of change as fast as it has been, the financial services industry of the future is hard to predict. From our perspective, the best response to that is to engage in the conversation, to understand as much as we can, but above all keep a simple focus on how innovation helps us promote competition, benefits consumers and strengthens markets.
We’re beginning to see firms large and small experimenting with new ideas, new innovations. Seeking to offer different services to consumers. To create value for their customers and ultimately their firm. This is how effective competition should work, and something we will continue to promote through Project Innovate.