Trends In Digital Regulation

There are so many initiatives designed to control the digital world that I'm struggling to keep track. 

There's also plenty of overlap and commonality in the issues and regulatory solutions, as well as the digital environments and problems the solutions seek to address. 

So I put together a few slides for ready comparison. 

Interesting to see what leaps out...

Trends in Digital Regulation from Simon Deane-Johns

RegTech Bottleneck?

The UK's Financial Conduct Authority is rightly proud of its Innovation Hub, Regulatory Sandbox and new "RegTech" approach, which includes "managing regulatory requirements more efficiently, and... how we can best support developments and potentially adopt some RegTech solutions ourselves."

But the figures suggest that either more resources are required or there has to be a quicker route to market for new firms.

Of 413 requests received as at February, about 215 firms (52%) obtained support from the FCA's Innovation Hub. But only 39 firms (18%) have either been authorised (18) or are going through the approval process (21).  And in a recent statement defending its record on processing applications for authorisation by P2P lending platforms, the FCA said that it has only processed 8 of 94 applications received (about 9%).

Something is gumming up the works!

In its statement on the P2P lending process, the FCA bravely claims that it is "taking a proportionate approach to regulation, recognising the need for consumers to be adequately protected and have the information they need". It has a deadline of 12 months to decide on applications (actually 6 months for complete applications). But it's not like these firms are trying to flout the law - they have willingly approached the FCA for approval. Indeed, the P2P lending industry spent years lobbying for regulation of the sector, which was introduced by the Treasury in early 2013 and took effect on 1 April 2014. Yet since then the FCA's figures suggest that over 40 new firms have applied to enter the market and 42 of them are unable to trade because their application to do so is yet to be approved. Another 44 firms are still relying on their interim permission by virtue of being licensed under the previous regulatory regime, and therefore (ironically) cannot offer the new Innovative Finance ISA because they are not yet fully authorised.

How many firms are able to persist against these regulatory headwinds remains to be seen, but the approach seems neither proportionate nor worthy of the FCA's ambition to foster innovation and competition for the benefit of consumers. So far, the traditional players remain pretty safely sheltered behind the FCA's regulatory wall.

Something must be done.

Either the FCA needs more resources or it must adopt a more expeditious approach to granting regulatory approval - a mechanism that allows firms to begin trading more quickly under certain thresholds, for example, as is the case with small payment institutions and small e-money institutions. Indeed, payment services firms enjoy their own regulatory regime (with a 3 month turnaround time for complete applications); and the P2P industry lobbied for that regime to be used as the basis for regulating their platforms - an approach which the French and Spanish have since adopted and the European Banking Authority supports.

FCA Announces #ProjectInnovate

Hard on the heels of the Transforming Finance workshop, the FCA announced in a speech by CEO Martin Wheatley last week that it will support innovators by: 

• providing 'advice on compliance' to firms who are developing new models or products advice so they can navigate the regulatory system;

• looking for areas where the system itself needs to adapt to new technology or broader change – rather than the other way round; and

• launching an incubator to help innovative, small financial businesses ready themselves for regulatory authorisation.

The umbrella term for these initiatives is "Project Innovate". I look forward to hearing more about it, including contact details etc.

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!

Innovation Meets The Financial Services Bill

Embedded below is a set of amendments to the Financial Services Bill which I've prepared with the help of a colleague, Tony Watts, at the invitation of several Peers to aid in their review of the Bill. The paper builds on a submission to the UK government in January.

The aim is to require the authorities to encourage responsible innovation in retail financial services generally and, as a case in point, to clear the way for the growth of peer-to-peer platforms - transparent, low cost services that are open to all but which don't tie up vast amounts of capital or require a public guarantee.

Specifically, these amendments will:

1. Generally oblige the financial authorities to look outside the regulated markets when assessing whether there is adequate competition within those markets;  
2. Remove the uncertainty, cost and delay in launching new peer-to-peer platforms, by creating a clear set of rules by which they must operate, regardless of the type of instruments available (reflecting the carve-out for retail payment services from the historic ‘banking monopoly’); 
3. Enable the inclusion of peer-to-peer loans and investments within the small range of assets currently available to ordinary people via ISAs.
4. Enable the same process of evolution towards cost-efficient and transparent financial services that we have already seen in other online retail markets.

The document is still in draft, and comments are welcome.

Proposed amendments to the financial services bill sdj 21 06 12

View more documents from Simon Deane-Johns.

Image from NE Generation.

Abandon Hope All Ye Who Enter The Financial Services Bill

The new financial regime is unsinkable

As a desperate alternative to the Eurovision Song Contest, last night I combed the latest version of the Financial Services Bill for a glimmer of evidence that the Government understands the extreme difficulty of innovating responsibly in a retail financial world dominated by a byzantine regulatory regime. 

Alas there's nothing much in the Bill except two new supervisory deckchairs from which the authorities can watch our major financial institutions power us inexorably into the icy depths. 

To be fair, the word "innovation" does appear once in this homage to complexity. But it is used in a way that could only be intended to evoke the maximum possible relief amongst those terrified of it. The financial authorities need only promote effective competition and innovation within the markets for regulated financial services. God forbid there should be a process for developing proportionate regulation of emerging business models, or that the authorities should provide guidance to those intent on delivering better outcomes for consumers than established firms or existing services. Here is the leading, bleeding, cutting edge of our giant financial regulatory regime:

"1E The competition objective

(1) The competition objective is: promoting effective competition in the interests of consumers in the markets for—
(a) regulated financial services, or
(b) services provided by a recognised investment exchange in carrying on regulated activities in respect of which it is by virtue of section 285(2) exempt from the general prohibition.

(2) The matters to which the FCA may have regard in considering the effectiveness of competition in the market for any services mentioned in subsection (1) include—
(a) the needs of different consumers who use or may use those services, including their need for information that enables them to make informed choices,
(b) the ease with which consumers who obtain those services can change the person from whom they obtain them,
(c) the ease with which new entrants can enter the market, and
(d) how far competition is encouraging innovation."