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FinTech: Putting the innovation into regulation?


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Summary: The FCA is a global leader in regulating FinTech. But there’s clearly scope for its enthusiasm for innovation to conflict with its consumer protection statutory objective. How will this tension pan out?

The FCA – championing new FinTech frontiers…?

The FCA prides itself on being simultaneously a proponent and regulator of the UK’s FinTech sector, a more business friendly combination when compared to other jurisdictions’ regulators. 

GRAPHIC: The tension between championing new frontiers and reinforcing regulatory boundaries >
Pursuant to the FCA’s statutory mandate to promote competition in financial services, it launched Project Innovate in October 2014, an initiative to foster innovation in financial services aligned with that objective. The result has been an open dialogue with FinTech businesses in order to remove regulatory barriers to innovation where necessary. The FCA’s regulatory ‘sandbox’ is a good example of this engagement. It’s a virtual ‘safe space’ which allows companies to test their products and services in a regulatory-light, but live, environment. The FCA’s objective is to both improve time to market, and reduce regulatory uncertainty for early-stage companies that wish to test novel business propositions.  
The FCA has also been closely involved, with HM Treasury and the Department of International Trade, in establishing ‘FinTech Bridges’ with overseas jurisdictions (so far, Singapore, the Republic of Korea, Australia, China and most recently Hong Kong). These bridge arrangements are intended to help UK FinTechs expand internationally. Co-operation arrangements between the FCA and overseas regulators in Australia, China, Singapore or the Republic of Korea contain cross-referral provisions to help promote innovation and reduce barriers to entry for FinTech firms doing business with, and from, these jurisdictions. 
The FinTech Bridges initiative also enables the FCA to share information with, and learn from, equivalent regulators about market trends in financial innovation and regulatory issues affecting FinTechs. These global lessons should help balance innovation, regulation and customer trust.

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… Or reinforcing the boundaries of regulations?

New technology, however, creates new market risk. As much as the FCA wants to support the FinTech sector, at the end of the day, it’s still the regulator. In recent reviews and Calls for Inputs, it has highlighted a number of FinTech developments that could create negative consumer outcomes.  
In its Call for Input on big data, for example, the FCA noted how Big Data can help insurance clients. It referenced telematics - used by insurers to help customers manage their risk and therefore reduce costs with ‘pay-as-you-behave’ premium calculations. However, it is becoming increasingly apparent that Big Data can also be used by firms to justify questionable pricing practices for consumers. The FCA is particularly interested at present in how firms are using information that they hold about customers’ levels of price-sensitivity in the retail markets. In its October 2016 Mission Statement the FCA said that it is looking carefully at what level of price discrimination and cross-subsidy it ought to allow to take place in those markets, in light of its consumer protection statutory objective.  
Additionally, as part of the FCA’s review of the crowdfunding market, it identified that whilst crowdfunding can create competitive pressure that benefits investors and borrowers, online portals for financing or refinancing activities can pose risks. For example, the current regulatory regime does not directly address the risk of some firms not being sufficiently clear and fair in their approach to assessing the creditworthiness of borrowers.

So, what role should FinTech firms assume that the FCA plays?

Some might say that the FCA has carved out an arguably contradictory role for itself as both nurturer and regulator of the UK’s FinTech industry. 
As the FinTech sector continues to evolve, we predict that FinTech services which enhance consumers’ experience of the sector will continue to be fully encouraged by the FCA, so long as they operate under no illusions that the rules apply differently to them than to other regulated firms.
The FCA’s Director of Strategy & Competition, Chris Woolard, recently summarised the position very honestly when he said:
“In ‘regulator speak’: you must have the correct permissions for your regulated activities. In layman’s terms: if you hold deposits like a bank then you should not be surprised if we expect you to be regulated like a bank. We want innovation, but we will not compromise on market integrity or consumer protection”.  
FinTech firms must therefore ensure they are ready for the full gamut of applicable FCA regulation once their time in the sandbox comes to an end.

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