A helping hand for the invisible hand: the FCA’s approach to competition and innovation

Speaker: Christopher Woolard, Executive Director of Strategy and Competition
Location: Competition Policy 2018: The relationship between antitrust, innovation and investment, Chatham House, London
Delivered on: 11 June 2018

Highlights:

• The FCA’s approach to competition is driven by our objectives to make markets function well and promote effective competition in the interests of consumers. This last part – in the interests of consumers – is crucial, because not all competition is good competition.
• We create the conditions that allow competition to work as well as it can through initiatives like Innovate.
• Open Banking has the potential to solve some of the big problems we see in competition by increasing consumer engagement.
• But new technologies also present challenges, for example in the massive collection of customer data.

Note: this is the speech as drafted and may differ from the delivered version.

What the FCA’s role is, and what it isn’t

I’d like to start my remarks today with some basics on competition.

What it is.

And what it isn’t.

And then talk about what that means for us when we think about fintech.

The FCA’s competition objective is frequently misunderstood, possibly because we’re fairly unique amongst financial regulators in having one.

It isn’t a duty to dictate a particular market structure or mandate an outcome.

And it isn’t an explicit commitment to promote competitiveness.

There’s a big enough debate around this last point to sustain a whole other panel discussion. But in order that I stick to my time let me just say this.

Although competition and competitiveness are often linked – competition forces firms to operate more efficiently, thereby increasing productivity and engendering greater dynamism in the economy – the FCA has no international competitiveness remit. Nor, given past history, do we believe it is desirable for us to have one.

Of course, we think about the needs of the market, particularly as the UK exits the European Union (EU) and promoting free trade and open markets becomes all the more important.

But this is grounded in our overarching strategic objective to make markets function well.

And we have a specific operational objective to promote effective competition in the interests of consumers: a recommendation of the Independent Commission on Banking, led by Sir John Vickers and established in the wake of the crisis.

This competition objective is focused on improving the process of rivalry between firms, rather than improving the competitiveness of any one firm in particular.

And it is this process of rivalry that leads to better outcomes for consumers, by forcing firms to work harder in terms of the choice, cost and variety of products and services they offer.

And therein lies the crux – the outcome of that rivalry between firms has to be in the interests of consumers.

Not all competition is good competition. Sometimes it can lead to a race to the bottom, and an erosion of standards. Part of our role is to step in when we see this happening.

What we want to see is a marketplace where, ultimately, consumers drive outcomes – rewarding firms who offer them value, variety and choice and punishing those who don’t by taking their business elsewhere.

Competition policy is not always fashionable. Competition can often be about long-term goals, rather than quick fixes.

Indeed, in the wake of the financial crisis it was pretty remarkable in political terms to see the Parliamentary Commission showing such faith in competition.

For the most part, though, governments in the EU, Europe and globally, from Teddy Roosevelt’s antitrust battles with ‘robber barons’ in the early 20^th century and onwards, have accepted the need for effective competition policy and enforcement.

That requires a varied toolkit. In the FCA’s case, that often means using multiple tools, such as the Competition Act or market studies, alongside consumer protection and enforcement, something that is often ignored.

We also have policy tools to help foster competition. A good example is regulators and legislators at both a European and national level developing Open Banking alongside the Payment Services Directive 2 (PSD2).

In and of themselves, the functionality and scope of these developments can be seen as limited.

But, I see them as a fundamental trigger for what comes next – to think more deeply about the shape of banking and payments in future and how they are evolving. The policy environment can help set conditions for creative tension.

It is for that reason that we, at the FCA, are undertaking a strategic review of the retail banking market. Not just to size it up now, but look at where it may develop, the possibility for new entrants and shifting consumer trends.

Tomorrow’s world, today

Part of creative tension is to drive innovation.

Innovation boosts competition, sees firms serve new niches, streamline processes and shake up the status quo.

When all these things are happening, our aim – to make markets function well so that consumers get a fair deal – moves from ambition to actuality.

But the reality is that these things don’t always happen on their own.

Sometimes the invisible hand of the market needs a helping hand.

That is why, since 2014, we have actively and directly promoted innovation through FCA Innovate[1].

At the heart of Innovate is the understanding that regulation designed to fit different products at a different point in time can hinder the progress of new technologies created for the here and now.

That’s why we decided that we had to create the conditions that would allow competition to work as well as it could.

This includes initiatives like the Sandbox[2], which gives innovative firms the opportunity to test their propositions in a controlled environment with real consumers.

This helps firms of all sizes get new products and services to market, and faster.

90% of firms from our first round of applications have gone on to market, with many firms finding it easier to get funding as a result of participating in the sandbox.

The result? Better choice. Better variety. Better outcomes for consumers.

And it helps us as a regulator understand the real-world implications of new technologies. We’ve seen this inform our policy approach towards distributed ledger technology (DLT) for example.

We are bringing the knowledge we have gained to the joint task force we have with the Bank of England and Treasury on cryptoassets.

And we are increasingly applying new technologies to our day to day supervisory work.

The level playing field

Few would argue against the benefits of this. 

But it does bear repeating that what we’re looking for is not fintech for fintech’s sake.

Rather, we are looking for products that serve a genuine consumer need, that offer a solution to an underserved corner of the market or a new approach to a thorny issue.

Utility should be the primary driver of innovation.

This holds true whether the firm in question is a start-up from the Silicon Roundabout or a long-established presence on the high street.

And yet, there is a feeling in some quarters that expectations are different for the former than they are for the latter; that somehow we’re giving young firms a leg up at the expense of incumbents.

This is simply not the case.

The fact is that we are presiding over a playing field where we expect participants to compete on merit.

There are no favourites, and there are no free passes.

But that means that if your best effort at innovation is an archaic, embedded IT system, while others are operating at the cutting edge to develop customer-centric solutions, it’s just not realistic to think you’ll come out on top or that anyone else should wait while you catch-up.

Not forgetting that incumbents can often count on brand reach and capital base, which offers significant advantages over newer rivals.

Ultimately, the companies that do well will be those that identify a genuine consumer need and serve it efficiently and effectively.

The future of financial services

Some incumbents have suggested that until we see fintech firms develop true scale – becoming so called ‘unicorns’ – it won’t make a difference. 

I think this is fundamentally flawed – or perhaps wishful – thinking, for 3 reasons:

• It ignores the impact that smaller rivals snipping at areas of high margin can have on incumbents – as we’ve seen, for example, in car insurance and other regulated markets like telecoms.

• It assumes that the protagonists shaking things up are small players, whereas entry from established platforms can be at scale – take Amazon or JP Morgan for example.

• And it overlooks the rivalry between incumbents themselves. For example when major high street banks move on Open Banking, others have to respond.

The potential of platforms

One fascinating question is how far could this go?

Could the technology that sits behind Open Banking solve one of the big problems we see in competition – lack of engagement, especially from information-poor or time-poor consumers?

As it stands, a banking app might look for the best deal on your savings and move your cash. Being granted basic permissions, it can sweep your accounts to ensure you maximise interest.

But why stop there? Why couldn’t it also look at your mobile phone bills or utilities and switch you to the best deal?

Japan’s Money Forward is doing just that today and has already notched up 6 million customers.

John Fingleton, former head of the Office of Fair Trading (OFT), recently wrote an article called 'From Open Banking, to Open Everything'[3], asking whether the exact same thing could happen in the UK.

The savings in time and money for consumers if it did would be huge.

The trouble is, switching in the future could be very difficult. We’ve seen the same challenges with bundles in telecoms and media – great to begin with but potentially hard to leave.

We all know that technology markets have long tended towards monopoly or oligopoly. That is often an international position, not just a domestic one.

A trend exacerbated by the massive collection of data, this century’s most precious commodity, is the focus of intense struggle to control it.

Personal data will be the currency of firms in the future, with services increasingly tailored to our circumstances and characteristics. Bring with it a multiplicity of ethical questions way beyond competition.

And where does that leave smaller or new market players who can’t gather data on the scale of its larger rivals? The potential for embedded advantage here is a real concern, creating the risk that the position of established players is consolidated and new firms can’t break in.

The question for regulators will be how to extract the best from markets, whilst avoiding these pitfalls. Given the nature of the market, the answers we reach will need to be increasingly international not just domestic.

That’s one of the reasons why we have proposed that we could build an international testing environment, a Global Sandbox[4], and why I’m also delighted to have been asked to chair the International Organisation of Securities Commissions’ (IOSCO) work on fintech.

Conclusion

Whatever the future holds, I believe the outcome regulation and competition have always sought to achieve – empowered consumers making informed choices in efficient and fair markets – will continue to hold true.

Achieving this in the future will require us regulators to play a different game – understanding innovation, using innovation in our own work and most of all harnessing the benefits of innovation for the good of consumers.