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Thursday, 15 May 2014

How The FCA Could Support Innovation And Diversity In Financial Services

Hats off to the Financial Conduct Authority for hosting and participating in The Finance Innovation Lab's recent workshop on Transforming Finance. It was an excellent, productive discussion and seems likely to help drive helpful change. For the sake of transparency, here are my notes/thoughts (unattributed, on the basis of Chatham House Rules).

The FCA board is interested in how the financial services market can be 'disrupted' in ways that are positive for consumers and small businesses. There is a new awareness of how regulatory uncertainty can be a barrier to entry/growth; and the need to get better at recognising the harm that comes from stifling good initiatives.

Key aspects of beneficial disruption include, innovation, diversity, and competition. There is evidence that competition within markets alone is insufficient, and can actually drive mis-selling (e.g. banks competed to sell PPI). Increasing diversity is also necessary, to enable competition amongst different business models and services in the same market. This requires the FCA to consider how firms outside the regulated markets are delivering better consumer outcomes, as well as firms within the regulated markets.

Greater transparency around fees, incentives and conflicts of interest allows excessive fees to attract competition and/or disintermediation; and the removal/re-alignment of perverse incentives and conflicts of interest.  

FCA could foster innovation with: 
  • a 'sandbox' for entrepreneurs/innovators to consider how new models might be impacted by rules - this could include an online method for extracting all the rules in the Handbook that relate to a certain product or activity; 
  • pre-authorisation workshops to coach firms through the evolution to authorsiation and obtain feedback on problems and potential improvements; 
  • a shortened, small firms registration process that would allow new entrants to operate under certain thresholds before going through the lengthy full authorisation process (as for small payment/e-money institutions);
  • a small firms unit made up of staff from each of the FCA's main 'silos' to ensure joined-up focus on innovation and diversity, consistency, fairness and positive discrimination in favour of sensible initiatives.
The regulatory/policy environment needs to be more open and accessible. We need to know which staff are responsible for what. The FCA tends to draft its rules and communicate in its own unique language, rather than in the language of the markets it regulates or even the same terms used in directives/regulations it is supposed to implement. It also needs to 'get out more', and participate in more forums involving firms, trade bodies, policy officials from relevant departments (e.g. Treasury and BIS) and the European Commission. There should be more public roadshows, roundtables etc - perhaps the FCA could host an annual, wider version of the P2P Finance Policy Summit that was run in December 2012? The consultation process should more positively discriminate in favour of those outside the incumbent firms, it should be more socially networked with a more widely telegraphed timetable. In this context it would also be helpful for the FCA to keep a register of who is lobbying it (e.g. as Ministers must disclose). There should be a body to scrutinise what the FCA (and HMT) is consulting on and how the consultation process operates.

The FCA views the market through the lens of products, and types of firms and their activities, rather than from the standpoint of the customer and how the customer can be empowered to achieve their own financial outcome. The customer is seen as victim, whereas the tide of technology and innovation is delivering greater control to the customer (e.g. over personal data - and financial transactions are just another type of data).

The FCA needs to participate in the debate over the best means of credit creation - should we separate banks' role in money creation from their role in actually allocating credit? Should we strip banks of their role in creating money altogether, as covered by Martin Wolf recently

How do we distinguish genuine innovation or invention from merely incremental changes to existing models/products? New rules should be tested for their potential impact on diversity, innovation and competition.

The Financial Services Consumer Panel and Smaller Business Practitioner Panel should have specific obligations to consider the above issues, as well as the interests of alternative finance providers and civil society more generally.

Interested in your thoughts!

Thursday, 8 May 2014

#RedTape Redline - Mark-up Your Laws!

During any respectable contract negotiation, the party 'holding the pen' produces a mark-up or "redline" of each draft of the contract showing the changes it has accepted so far from the previous version. In fact, it's considered offensive and sneaky not to show those changes. It's as if you're hiding something and don't want to make it easy for the other side to understand the deal they're being asked to sign up to. 

Not so for the people drafting our laws and regulations. No. While they have their own internal mark-up of how a piece of legislation is being amended from time to time, they keep it to themselves and only use it for the purpose of writing up an amending 'statutory instrument' that shows only the change and where it is supposed to be plugged into the original. Nuts, unless of course you're still writing with a goose feather, or you're the one proposing the changes and you want to slow your opponents down by making them reverse-engineer what the changes looks like in context. Or you're one of the legal publishers everyone is forced to pay in order to get an up-to-date version showing all the changes once they are passed, since not even the government's own legal publishing unit has the resources to keep up-to-date with how all our laws have changed.

I am not the first to complain about this, as I pointed out in 2009 in the context of the Free Legal Web initiative, which you can now see is defunct. Dragged under the waves by the combined weight of institutional inertia, investor scepticism and despair... but I'll leave it to Nick Holmes to tell that story.

And yet, in true Terminator fashion, this won't die. Yesterday, we were treated to a presentation on the new OpenLaws initiative to "make legislation, case law and legal literature more accessible" (please,  take the survey).

It's thought that OpenLaws might benefit from including European law. Certainly it brings European cash, which is smart. But if there's one institution committed to less transparency than the UK Parliament, it's the European Union. You'll see that I've previously considered launching a quest to find the source of European law, but abandoned the idea immediately. Anyone who's tried to keep track of the European Commission amendments to draft directives and regulations as they ooze their way through the European "ordinary legislative procedure" quagmire will understand the true value of the lobbyist. I can't imagine sunlight ever falling on that process.

But I may be wrong. And it could well be that the OpenLaws' social media tools concentrate enough rage against the EU machine that transparency will be introduced. In the meantime, we'll have access to case law, articles, commentary and unofficial redlines of legislative amendments, even if we can't shake the uneasy feeling that only a few officials fully understand what our Parliaments are churning out.