Regulating fintech: Protecting the market without smothering innovation

  • Dave Lewis, Director at Alpha Insight

  • 25.01.2016 10:00 am
  • Fintech

With a wealth of new ideas and innovation continually coming to market, the UK’s financial technology sector is a very exciting place to be. New start-ups are constantly emerging, causing incredible changes in the industry.

It’s perhaps not surprising then that many investors’ sights are set on London, a hub for financial services and technology innovation. Indeed, in 2014 alone, the UK government estimates the domestic financial technology sector attracted a massive £342 million in investment and generated £20 billion in revenue.

From new and more effective capabilities in monitoring major banks’ business flows, to peer-to-peer lending and apps that facilitate the transfer of small amounts of money between consumers, new companies are capitalising on the hybridisation of technology to develop and pioneer effective, time-saving solutions.

Meanwhile, household technology brands such as Apple are also prompting a step-change in the way consumers pay for goods and services with the launch of Apple Pay in the UK.

Yet, as more technology companies follow their lead and roll out financial services to an increasingly open-minded market, there is a clear need to protect consumers with no experience of new technology and where its potential pitfalls lie.

As the recent spate of headline corporate security breaches highlights, many users will willingly and trustingly subscribe to new services without knowing where their data is kept and who has access to it. In future, the use of decentralised digital currencies such as Bitcoin by newer companies will only add to these risks.

In addition to allegations of fraud and wrong-doing, failure of processes and systems – as experienced by RBS and HSBC in the UK this year – can do untold damage to reputation and is likely to result in official warnings from the regulator, with the possibility of weighty fines.

To protect businesses, consumers and the industry itself, it is clear then that the fintech sector is going to be subject to regulation. However, in order to strike the right balance between protection and innovation, it is worth considering whether the regulators need to be as heavy-handed as they currently are with banks.

In particular, there is industry-wide concern that the weight of regulation designed to prevent another financial crash or market-wrecking institutional failure is itself inhibiting the global efficiency and successful operation of banks.

To fulfil the requirements of new regulations such as BCBS239, for instance, major banks have to be incredibly rigorous in their reporting and demonstrate not only that they are achieving compliance but also provide evidence.

The best way to achieve this is to implement constant business flow monitoring and alerting based on the right business logic, allowing action to be taken to ensure compliance. However, this is something many organisations are still ill-equipped to do – despite the fact that the January 2016 deadline is just around the corner.

In protecting the consumers and organisations that use new and existing financial services, the risk, of course, is that regulation will stifle innovation. This is especially true in start-up hubs such as London that are attracted to the capital because they have access to the UK justice system and a vibrant domestic and international market, without the burden of legislation as seen across the different states in the US.

From an internal process perspective, this is something that could potentially be avoided in the first instance by having the right business logic on top of the monitoring tools.

Nevertheless, with public money and trust at stake, it is unavoidable that if the services provided by fintech firms include payments, they are going to be regulated in a similar way to banks.

While no-one wants excessive regulation or “regulatory principles” imposed on a company providing a new service that businesses and consumers want, whenever a consumer is involved, they must be protected. Most people accept that without independent regulation, the entire field is open to fraud and unfair exploitation.

With this in mind, the Financial Conduct Authority’s engagement in Project Innovate can only be seen as a good thing in that it seeks to encourage innovation by identifying and remedying policies that act as barriers.

By involving fintech companies, regulators and disinterested experts in the field, it offers a much more balanced approach and the potential to deliver the right outcome – for the consumer, the market and the UK economy.

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