No-one needs reminding that there have been considerable technological advances recently, and the pace of technological change is likely to continue. The financial sector, like any other, needs to embrace the brave new digital world, and this issue was the centrepiece of two recent discussions by directors of the Financial Conduct Authority (FCA).
Christopher Woolard, executive director of strategy and competition at the FCA, told well-known City of London daily newspaper City AM that he had seen examples of innovative new firms who were examining ways of ensuring that their operations would not be subject to regulatory scrutiny.
Mr Woolard commented:
“The worst one I saw was a small startup, so five guys, and they’d spent £750,000 in six months trying to design something with their lawyers which avoided regulation.
“Actually, the position they really needed to fit in within the regulation was very simple. We established that with them in the course of an afternoon.”
Cases such as this led the FCA to establish Project Innovate, to encourage firms introduce innovative financial products and services to the market. Included within Project Innovate is the FCA’s Regulatory Sandbox, where a number of firms, both large and small, have been given special permission to waive certain existing regulatory requirements in order to test innovative new products and services.
Mr Woolard also commented:
“From a consumer’s perspective, this is maybe quite an exciting time where we begin to see change in the financial services industry that is perhaps not dissimilar to some of the changes we might have seen in other industries that have been impacted by technology in the last 15 to 20 years.
“So far, largely financial services has been quite resistant to that and we’re seeing a period open up where, actually, we could see some real change.”
Project Innovate was also addressed by David Geale, Director of Policy at the FCA, when he spoke to weekly industry podcast FinTech Insider.
Mr Geale explained the rationale behind Project Innovate by saying:
“Project Innovate is something we’re really proud of. Some firms were struggling with how new ideas fitted within the existing regulatory framework, particularly where that framework wasn’t designed with those ideas in mind. So, that was really the genesis of Innovate – to say how can we work with those businesses, partly to help them and partly to help us make sure that regulation moves with the times.”
Specifically regarding the Sandbox, he commented:
“The sandbox is there for firms who really need to test in a live environment.
“The example I often give is around disclosure. If I actually present something to you and say, ‘This is the current disclosure, here’s a new version, which one of these do you prefer? Which one of these do you understand?’ well, to a degree, that’s cheating. It’s better than nothing in terms of testing, but you’ve cheated, because you’ve got people to read it in the first place, and that’s generally the core challenge, is getting people to engage, getting people to read.
“So, if you can test that in a live environment, and say, ‘Okay, we know what you would have had, now what’s the difference in actual behaviour with this new form,’ or new style, maybe digital disclosure, for example, you can actually really see the impact of the results.”
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