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Sunday, 25 March 2012

A Financial Innovation Federation?

On Friday, the Finance Innovation Lab brought together various people who are active in the financial policy space to consider whether disruptive policies can help deliver a sustainable financial system. Chris Hewett explained where various policy ideas feature  in the evolution from a 'glint in the eye' to 'political battleground'. He then introduced short speeches on Reshaping the Banking Sector (from Tony Greenham of the NEF), Re-interpreting Fiduciary Duty (from Catherine Howarth of Fair Pensions) and Enabling the Growth of P2P finance (from yours truly, summarising recent submissions to government and the response - slides embedded below). Chris then invited us to discuss the best policy ideas based on the 3 approaches.

Our particular break out discussion focused on how a new regulatory 'channel' might "create an environment for responsible financial innovation to flourish". The context for this exercise was the government's reluctance to amend the financial regulatory framework and related tax incentives to promote alternative finance.

We thought that financial innovation could flourish within a forum comprising groups or networks that reflect the functions within any business - IT, marketing, finance, operations, legal and so on - with a group focused on facilitating the development of innovative business plans through a series of local, regional and national 'finance innovation labs'. Let's call this overall environment a "Financial Innovation Federation". The Federation could be governed via a council that would facilitate agreement on the criteria against which innovative ideas would be judged as being 'responsible' or not, as well as the governance of the body itself and that of its members.  Such agreement could be facilitated via an open, web-based system of governance in which all the members of the Federation could share their knowledge and vote on governance rules and so on. The council could comprise representatives of member businesses and their customers, independent non-executives, and representatives of the Financial Conduct Authority, HM Treasury and Business Innovation and Skills, so that the key regulators and policy makers would be directly engaged with the process of self-regulation and could not claim to be somehow separate from or 'above' the innovation process. The presence of government representatives would mean the approach would be better described as 'co-regulation', which has parallels in other industries. Proportionate formal regulation could evolve as necessary and appropriate.

The basic criteria against which innovative ideas could be judged as 'responsible' or not would be their simplicity, direct connection between participants, product neutrality, the promotion of diversification and whether a real customer problem is solved. The rules relating to the operation of the 'approved' services would focus on managing shared operational risks at the platform level, such as the Rules and Operating Principles of the Peer-to-Peer Finance Association (P2PFA). The overall result would be the creation of a 'safe harbour' in which many different innovative business models could flourish under the watchful gaze of a community of those with expertise in managing operational risk, as well as those charged with protecting consumers and the financial system itself.

In essence, this has already been happening over the past 6 months or so, in the context of submissions made to the Red Tape Challenge on Disruptive Business Models, the Breedon Taskforce and numerous approaches to the FSA by business teams seeking either regulatory guidance or authorisation. A 'Financial Innovation Federation' would draw all this knowledge together more tightly, enabling the more cost-efficient iteration of business plans and quicker time to market for responsible, workable, innovative business models.

We considered that the most useful next step towards establishing such a Financial Innovation Federation would be a meeting between the The Finance Innovation Lab, the P2PFA and other interested parties to explore the practicalities.