Innovation and improving outcomes

Speaker: Christopher Woolard, Director of Strategy and Competition
Location: The Banking Hall, London
Delivered on: 16 June 2016

Key points:

• The FCA’s interest in innovation is primarily linked to our duty to promote competition in the interests of consumers.
• Since the launch of Project Innovate, we have received over 500 requests for support and offered direct support to over 250 firms who presented genuinely innovative ideas likely to have customer benefit.
• The Advice Unit has a specific remit to support firms developing automated advice models which seek to deliver lower cost advice to consumers.
• More consumers than ever require access to financial services that serve their changing needs throughout their lifetime.

It’s a pleasure to be here this morning to speak about the role that innovation can play in developing the UK’s financial landscape.

I wanted to talk about 3 main points:

• how has regulation been changing to promote innovation
• some key consumer issues
• how do our priorities as a regulator reflect both of those themes

Before I do, why are we as regulators interested in innovation? Everyone I think would agree that innovation and disruptive technologies are making a growing contribution to the global economy, but they also have the potential to make a tangible impact on the market benefit of consumers.

Banking by smartphone and tablet has already become both taken for granted and the leading way customers manage their finances, with mobile banking having now overtaken branches and the internet the most popular way to bank in the UK.

FCA and innovation

So how is the FCA harnessing the power of innovation to the benefit of consumers?

The first thing to say is that our interest in this space is primarily linked to our duty to promote competition in the interests of consumers. One of the best ways we can do this is to foster disruptive innovation.

Our main vehicle for this is Project Innovate.

Launched in October 2014, Project Innovate offers individual support to new and established businesses to enable them to introduce innovative financial products and services to the market.

Since Project Innovate was launched, we have had over 500 requests for support and offered direct support to over 250 firms who presented genuinely innovative ideas likely to have customer benefit.

Project Innovate has been a watershed moment for the FCA. And it has produced genuinely meaningful results. From the initial applicants we have 40 who have been authorised or who are close to being authorised and launching new products that may not have otherwise come to market, including very short-term insurance, new ways of assessing credit worthiness or raising funding.

But 18 months or so after we launched the Innovation Hub, we’re looking to be bolder and more ambitious in our approach.

Regulatory Sandbox

A development of Innovate is the Sandbox, designed as a safe space to test new ideas without incurring all of the normal regulatory consequences. 

We were the first regulator to launch a programme like the Sandbox anywhere in the world and we are open now for applications to our first cohort. 

It should underline our deep commitment to innovation and our willingness to think radically. It is an experiment for all involved and will need to learn as much as the firms engaged in it.

Advice Unit

A further development building on Project Innovate is the Advice Unit.

The theme of access is one that we’ve seen crop up again and again in our recent work, including in our joint review with the Treasury of the financial advice market, published in March.

The Financial Advice Market Review, or FAMR, explored the barriers preventing people from accessing financial advice and set out recommendations for overcoming these challenges.

Technology takes centre stage among these recommendations.

Take, for example, ‘robo-advice’, or ‘automated advice’ as we prefer to call it.

Automated advice offers the chance of ensuring consistent outcomes for consumers, while also stimulating a more engaging and cost-effective advice market.

The Advice Unit has a specific remit to support firms developing automated advice models which seek to deliver lower cost advice to consumers.

The focus will be on models which look to serve the gaps in the current market identified by FAMR. That is, investments, pensions and protection.

To be clear, automated advice models must meet the same standards as face-to-face advice, and the responsibility for ensuring their model meets the regulatory requirements rests with each firm’s senior management.

Once we have taken a few firms through the Unit, we will also look to share the lessons learned from these experiences in the form of tools and resources which will be publicly available to the whole industry.

TechSprint

The final area where we are examining regulation is our work around regulatory technology or Regtech. How can technology offer solutions to regulatory issues? As part of this we held a TechSprint in April.

This event brought together a small group of financial services and technology providers with the aim of exploring how technology can help to generate new ways of looking at and solving difficult problems faced by consumers.

Participants presented an impressive range of ideas for tackling the issue of access to financial services, which they then turned into real, prototype working applications.

Ideas ranged from a multi-lingual artificial intelligence app designed to facilitate communication between a consumer and their bank to a simple tablet aimed at vulnerable consumers or a tool to help sole traders applying for SME lending.

We are delighted that three of the ideas are likely to be taken forward and developed into full products. 

Finally I can’t be here without mentioning the new Bank Unit.  As well as looking at the newest kinds of business model, we have overhauled our approach on how we authorise traditional banks. Working with our colleagues at the Bank of England we introduced the process of mobilisation – some high standards but the ability to tackle them in a neutral progression.

Consumers

So, we are changing how we regulate. Firms can see and feel this now. What about consumers?

Things like products produced in the TechSprint event have the potential to make a real, positive impact on consumers’ lives. However we need to remember that for some consumers, these innovations can’t come soon enough.

Recent social and demographic changes mean consumers are increasingly being expected to take more responsibility for their own financial wellbeing.

An ageing population, changes in the housing market and evolving employment patterns, not to mention recent pension reforms, mean a greater number and variety of consumers are now being required to make complicated decisions about how to manage their money.

In this climate, more consumers than ever require access to financial services that serve their changing needs throughout their lifetime.

But we have found that potentially millions of UK consumers cannot use the services that would help them meet their needs and play their wider role in financial markets and the economy. The demographic of affected consumers is extremely broad. For example people living with cancer who can’t access travel insurance.  

In response to this challenge, a couple of weeks ago we launched an Occasional Paper on access to financial services in the UK.

Throughout the paper, technology was identified as both a challenge to manage and a force for greater inclusion.

For example, digital transformation in today’s banking sector poses a challenge for those who have difficulty getting online or with poor access to broadband.

But it can also offer a lifeline to those for whom traditional banking methods are out of reach – for example, disabled people who can’t get easily to their local branch.

Technology can also provide simple solutions to difficult problems. As part of our evidence to the Competition and Markets Authority’s inquiry on personal current accounts we looked at the effect of existing undertakings put in place by the Office of Fair Trading  on overdraft disclosures.

We found that annual interest statements had virtually no effect on consumer actions, but given immediately actionable information - text alerts and internet banking, overdraft charges can be reduced by consumers by almost 25%.

FCA key strategies for 2016

So it should be clear now that the FCA not only believes in the ability of innovative technologies to widen consumers’ access to financial services, but also that we’re giving practical support to firms developing these models.

As further proof of our commitment, this year we identified innovation as one of our 7 Business Plan priorities.

The reasons we chose innovation as a priority are simple.

• It can improve not only how products and services are designed, but also how they are distributed.
• It has the ability to drive down cost and push up the quality of service.
• It promotes competition between providers, which in turn is a powerful driver of better conduct and better outcomes for consumers.

Despite these obvious benefits, this priority should be seen alongside some of our other priorities such as our focus on the culture and governance or financial crime. We remain alive to the risks of technological innovation and the challenges it presents to markets and regulators alike, such as resilience, cyber-crime and, as I’ve mentioned, financial exclusion.

So it should be clear now that the FCA not only believes in the ability of innovative technologies to widen consumers’ access to financial services, but also that we’re giving practical support to firms developing these models.

So it’s important we get our approach to regulating firms in this space right. We seek to ensure that our regulation is proportionate, up to date and strikes the right balance between permitting innovation that delivers competition and long-term consumer benefits whilst maintaining adequate consumer protection.

Conclusion

So in conclusion, what do we hope to achieve by prioritising innovation this year? What does ‘success’ look like?

We know there will be new challenges and risks to face. But innovation has the power to make a real, tangible impact on consumers’ lives for the better.

We want to see stronger competition to serve consumers, ensuring their current and future needs are met affordably and appreciatively.

And I think we can all agree that that’s a cause worth pursuing.