City Week: how regulation can help the UK lead in Fintech

• Speaker: Emily Shepperd, Chief Operating Officer and Executive Director of Authorisations
• Event: City Week 2023
• Delivered: 26 April 2023
• Note: This is the published version of the speech which may differ to that delivered.

Highlights

• Regulators can help firms innovate by setting firm foundations on which they can grow. The sooner firms get a handle on regulatory issues, the sooner they can thrive and grow. 
• The FCA has helped firms foster innovation through our Sandboxes, Innovation Pathways and Early and High Growth Oversight schemes.
• The UK remains the most attractive destination for financial technology investment in Europe, and is globally second only to the United States.

At what point did you realise that blockchain, cryptocurrency, peer-to-peer platforms, smartphones, autonomous smart vehicles, tech giants and the birth of the internet might challenge your centuries-old banking model?

That is the question many executives of legacy institutions are reflecting on. And the solutions may often appear simple. Either invent new things or cut costs.

The first, however, sounds exhausting and overwhelming while the second is a race to attrition and a race to the bottom.

One bank – OP in Finland – chose a third way to innovate its way into the future: to follow the customer and branch out into other services, even ones that on the face if it were totally unrelated to banking.

The visionary heads at OP took a scalpel to their business model and set up – wait for it – an orthopaedic hospital in Helsinki in 2013. Four other hospitals followed in the next five years.

OP transformed[1] itself from being a bank selling health insurance into a bank that provided healthcare.

And it went further. It still sells car insurance but it also looked at the future of mobility so it invented an electric car renting APP and then partnered with an energy firm to roll out charging points.

Not content with selling home insurance, OP then dived into creating smart homes adapted for older people.

What OP did is what any legacy institution must consider. Innovation is not just about digitising existing services, cutting costs or even inventing new things. It is about thinking about what sorts of services customers will need, not just how they are delivered.

It is not long before today’s start-up challenger becomes tomorrow’s legacy firm.

Like the 20th century battle of the brands between Mastercard and Visa; Pepsi and Coke and Blur and Oasis, these rival positions often do a 180 degree tilt.

Some of the most enthusiastic fintech firms are actually centuries-old institutions. And some fintech start ups eventually become fully fledged banks.

David Rowan[2], founding editor in chief of Wired and author of the book Non-BS Innovation, has warned that innovation is often muddled up with invention.

There is no need to reinvent the bank or to thrash about looking for radical new inventions.

What there is a need for is to address what customers want even if it is outside a current business capability.

Here to help

So what can regulators do to ease your pain? What can they do to make it easier for fintech, to thrive?

The temptation is, of course, to say, rip up all the rules and just let us get on with it.

And there is definitely a point in executing rather than holding endless talking shops – what Rowan refers to as ‘innovation theatre’.

Yet one of the best things that a regulator can do to help innovators is to set firm foundations in place on which business can grow.

One of the essential ingredients is regulatory compliance, whether that is with KYC as your customer base grows, getting the appropriate licences or making sure the technology you are using meets sometimes a myriad of different regulatory rules.

As fintech firms grow, they often find themselves moving towards more regulatory scrutiny and eventually, for example, applying for banking licence.

It is nothing to fear.

The sooner you can get a handle on your regulatory issues, the sooner and faster you can grow.

The authorisations gateway is where we protect our market integrity and where in the last year we have turned away more firms than ever.

Why? Because they did not meet the standards that the thousands of domestic and global firms – including fintechs – who are authorised to operate in the UK have strived to attain.

It is more important than ever to root out the source of likely harm. The last few years, indeed the last few weeks, have shown we live in hyper-connected times.

As Executive Director of Authorisations, my job is to minimise disruption.

And we had enough of that several weeks ago, when no fewer than 60 people at the FCA worked all weekend and round the clock to see through the rescue deal[3] for Silicon Valley Bank.

So while I disapprove of market disruption, I actively embrace disruptors. After all, they may be tomorrow’s stable incumbents.

When I first arrived at the FCA, I had come straight from the private sector so had something of a culture shock when I realised just how many individuals had to feed in before a decision could be taken.

But actually, two years in, I can see that this approach is actually about collaboration.

As a regulator, we believe in charting a path before embarking on the journey but keeping our radar switched on so that we can course correct to avoid a threat or steer towards a better opportunity.

Maintaining a high quality and resilient financial services sector is one of the strengths of the UK market.

High standards of regulation will allow us to be in pole position to cope with some of the more tumultuous events, like the ones we have seen in recent weeks.

These high standards provide the solid foundations on which innovators can innovate and investors can invest – with confidence.

You may be surprised to learn – as I was when I first arrived – that the FCA is as much an innovator and incubator as it is a regulator.

If you were to only read our list of warnings and headlines, you would think we were the fun extinguishers of financial services, forever saying ‘no’.

But so many times, behind the scenes, we are saying ‘yes’ or at the very least ‘maybe’. Or more frequently, ‘try again’.

Regulator to Innovator 

Many of you will be familiar with our sandboxes, where we allow firms to test new ideas in a controlled environment before they are potentially unleashed on the markets.

The Regulatory Sandbox[4] gives firms access to regulatory expertise and the tools to test these ideas and pivot or adapt where needed. 

It also ensures firms are up to speed with the basics of regulation and can bring their product or service to market more quickly. 

Through our Sandbox, we are helping Cocoon[5], which makes it easier for people to insulate their homes by assessing property needs to obtain grants.

We have also worked with a start-up which verified identity to support anti-money laundering requirements when buying or selling a home.

Then there is Little Steps Financing[6], a start-up which provides a 0% interest financing product to allow parents to spread the payment of monthly nursery fees over several years.

During these straitened times, the work that Fair4ALLFinance[7] is doing is particularly important as it is piloting no interest loan schemes to help customers in vulnerable circumstances.

We have in previous years partnered with the British Heart Foundation in our sandbox, as the charity wanted to create a specialist travel insurance product with a bespoke medical screening process for consumers living with cardiovascular disease. 

We also run our Innovation Pathways[8] to help firms launch innovative products and services by helping them understand how regulation relates to their activities.  

This is open to both authorised and currently unauthorised firms who will need authorisation in future, as well as technology providers that are looking to deliver innovation to UK consumers or firms. 

So far, more than 830 firms have been supported through the Regulatory Sandbox and Innovation Pathways.

Early and High Growth Oversight

Once they graduate from this, a newly authorised firm could be considered for our Early and High Growth Oversight[9] function. This scheme helps firms to embed regulation from an early stage so they can stay strong and resilient in ever-shifting markets.

This is particularly important for innovators and fintechs who are testing new ideas that can bring value to consumers if done the right way.

Early and High Growth Oversight works with firms immediately after authorisation to help them move from concept to reality. 

Innovation doesn’t stop once firms are authorised: we know that businesses tend to pivot their business model in their early years. In fact in Early and High Growth Oversight we’ve seen 10% of our firms change their business model in the first year of being FCA regulated. These changes can mean firms are required to comply with different regulatory obligations.

We made a public commitment to extend the initiative to 300 firms, and we’ve delivered on this commitment.

In the medium to longer term, as firms pass through Early and High Growth Oversight, we’ll see newly authorised start-ups better understand their regulatory obligations and we’ll see a higher standard of compliance as they grow.

Crypto and Emerging Tech

Some of you may have participated in our crypto sprints, in which we collaborate with entrepreneurs, firms, investors, regulators and academics to try and find a way forward with regulation on a sector that has developed very much to challenge the existing rules and institutions.

We are now at the stage where many want to come within the parameters of existing rules and institutions in order to grow.

Until now, our remit has been limited to making sure that firms that operate here are not breaching anti-money laundering rules. We will also be prepared to take action where financial promotions have breached our rules once these rules are in force.

The message from us on crypto that tends to get the most airplay is that if you invest in crypto, you should be prepared to potentially lose all your money.

But we have also been helping crypto companies make their fund flows more transparent. Most of the crypto companies we recently registered under anti-money laundering rules gained registration only after working with us.

Some crypto firms that established elsewhere have collapsed, with consumers last in the queue for getting their money back.

Our first objectives at the FCA are to protect consumers from harm, maintain market integrity and promote competition.

We have a new secondary objective coming in, which has been embedded in the organisation, to promote growth among competitiveness.

And that is what all of our sandboxes, pathways, sprints and initiatives aim to do: nurture the roots of fledgling firms so they can grow and thrive in a way that is safe for consumers and markets and promotes competition.

We have – to date – avoided the fall out from some of the wilder effects of that have affected comparable markets abroad.

At a time of economic and political upheaval, our regulatory system has remained steady.

We have drastically reduced our pending caseload in Authorisations by nearly 60%. From 12,500 to 5,500, even with increased scrutiny and greater number of applications.

By the end of March we were allocating change in control notifications to case officers within 24 hours. For approved persons cases, an area where continue to see a high volumes of applications, we’re determining most applications in just over a month.

But we never rest on our laurels, particularly where technology is concerned.

That is why we run an Emerging Technology Hub which collaborates with industry, academia, policymakers and regulators to analyse the risks and opportunities that new tech poses to consumers and markets.

And we have also established a dedicated Data, Technology and Innovation function of 500 specialist colleagues.

But we are one cog in a bigger wheel that is trying to drive innovation forwards.

And one vehicle for that is the relative regulatory freedom we have post-Brexit.

Perhaps one of the most rapidly evolving projects we will work on is the Treasury-led Financial Market Infrastructure or FMI sandbox.

These FMI sandboxes will test whether and how legislation needs to be amended to adapt to a future with innovations such as Distributed Ledger Technology and tokenisation.

Globally, we are the forefront of innovation on issues such as ESG.

A week ago we led the launch of a Greenwashing Techsprint[10] with our regulatory peers from around the world in the Global Financial Innovation Network.

Our aim is to develop a tool or solution to tackle the risk of greenwashing in financial services so I would urge anyone who wants to get involved to chip in. The sprint remains open until mid May.

The Powerhouse of Growth

It is not very British to trumpet our collective achievements as an economic powerhouse. 

But it is important to remember that the UK remains the most attractive destination for financial technology investment in Europe, and is globally second only to the United States. 

We are third in the world for AI research and development. We are home to a third of Europe’s total AI companies and twice as many as any other European country. 

We only have to look at how the sandboxes are replicated around the world to recognise that we are doing something right here, we are leading. 

We urge you to get involved, whether it is with our forthcoming sprints, our Innovation Pathways, our Early and High Growth Oversight programme or our sandboxes.

Together, we can help fintechs and other financial service firms navigate their way through regulation so they can flourish and grow.