11:YEARS part one: regulatory reform
In the first part of a series, we examine the role of UK regulatory reform in sowing the seeds of a thriving fintech ecosystem.
It’s been more than a decade since the Global Financial Crisis of 2007-8, but the scars left by the disaster have yet to fully heal. Consumer sentiment toward most financial institutions remains lukewarm, and many are worse off financially than they were 15 years ago.
But as so often happens in unstable and uncertain times, there were those who saw it as an opportunity, in this case, to reimagine what the financial services industry could be and do.
By unleashing talent and allowing the inflow of investment, regulators helped turn London into the global leader it is today
In its wake, a select group of regulators, entrepreneurs, technologists and investors reimagined what the financial services industry could be, tackling the issues that created, exacerbated and were caused by the financial crisis.
Our documentary 11:YEARS shined a spotlight on these figures, showing how the UK – and London in particular – emerged from the financial crisis to become a thriving fintech ecosystem.
This blog will examine the ways in which regulators encouraged this growth. By unleashing talent and allowing the inflow of investment, they helped turn London into the global leader it is today.
The Birth of the FCA
The first step toward a post-crisis regulatory regime was the dismantling of existing bodies and the founding of new regulatory entities. In 2013, the FSA was split into two new organisations: the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA).
Tasked with maintaining the integrity of the UK’s financial system post-crisis, the FCA has played a major role in developing the UK’s fintech ecosystem. It is unusual among global regulators as its mandate explicitly includes the promotion of effective competition in the interests of consumers. That means it has a greater motivation to promote and foster innovation than many of its peers.
‘You want competition to create the incentives for firms to really try and attract and deliver great service to customers,’ says Chris Wollard, Executive Director of Strategy and Competition at the FCA. ‘You want competition because it tends to have a positive impact on pricing, and you want competition because it stops institutions becoming complacent’.
One of the FCA’s key efforts is Project Innovate, a programme that supports cutting-edge firms that are just breaking into the industry.
Launched in 2014, Project Innovate brings six initiatives to applicable financial services companies. Perhaps the most impactful of these offerings is the Regulatory Sandbox, which lets both authorised and unauthorised participants test products and services with real consumers in a controlled environment. This facilitates easier access to finance and allows companies to identify and build consumer protection safeguards.
The Regulatory Sandbox has been a resounding success, reducing the time it takes for firms to get authorised by around 40% and significantly cutting participants’ time-to-market. It has also served as a model for similar sandboxes in countries such as Canada, Australia and Hong Kong.
Other Project Innovate initiatives include:
- GFIN: the Global Financial Innovation Network, which provides cross-border testing capabilities and shares insights on new innovations in different markets.
- Advice Unit: offers instruction on automated advice and guidance models for companies in the investment, pension, protection, mortgage, general insurance and debt segments.
- Regtech: provides two dedicated regtech workstreams: Direct Regulatory Reporting, which explores how technology can improve the submission of regulatory reports; and Techsprints, which allows invitees to explore new technologies and processes in a range of regulatory areas.
New Bank Licensing Regime
The Prudential Regulation Authority (PRA) is the other body that emerged. As part of the BoE, it’s responsible for creating and enforcing policies that ensure financial institutions operate safely and securely.
After launching in 2013, the PRA sought to encourage new entrants into the UK banking market. To do so, it lowered the initial minimum capital requirements for small bank licence applicants to £1 million (or €1 million - whichever is higher).
New entrants were able to succeed at launch by offering products and services that customers wanted and needed
The plan worked. Since 2010, 18 new UK banks have been granted, and held onto, banking licenses.
The regime’s success was partially due to ‘restricted licences’, which allowed the new banks, a number of which were digital-only, to operate with a restricted volume of customer deposits (and therefore real customers) while they iterated their technology and accrued more capital. As a result, the new entrants were able to succeed at launch by offering products and services that customers wanted and needed.
The UK regulators’ success in encouraging new banks to enter the market has spurred regulators in other markets to follow similar patterns. This has resulted in new banks, particularly digital-only banks, cropping up all around the world.
Today, the UK finds itself at another turning point as it prepares to leave the EU. The future is far from certain, so what’s next for the country’s regulatory regime?
The UK is likely to continue following the EU’s regulatory bodies closely, allowing as many firms to continue operating across both jurisdictions as possible. That said, many companies are currently authorised by a single regulator but operate across the EU under a system known as “passporting”. That means that a large number of UK authorised firms are seeking new authorisation in an EU country, and vice versa, to ensure they can continue to operate in their current fashion. This consumes significant resources, perhaps too many for some startups, and creates the potential for firms to fall foul of differences in the rules associated with authorisation in different countries.
Regulators have already adopted an iterative, adaptable approach that will stand them in good stead
The UK’s Cooperation Agreements with countries outside the EU are unlikely to be affected. In fact, the most recent agreement with Australia specifically says ties will be strengthened post-Brexit. The FCA will want to sign more cooperation agreements with new jurisdictions to ensure the UK fintech ecosystem maintains links with like-minded hubs, providing a way to share knowledge and ensuring UK firms have a range of options should they choose to scale internationally.
Ultimately, it’s unlikely that Brexit will affect UK regulators’ approaches to fintech and innovation. These bodies have already adopted an iterative, adaptable approach that will stand them in good stead. Their continuity of support and guidance should reassure both firms that are already in the UK as well as those that are looking to the region as an expansion market.
Want to know more? You can hear directly from the Bank of England and the FCA in 11:YEARS, our new documentary that charts the rise of UK fintech.