25 October 2014

FCA to foster fintech innovation; Treasury pushes P2P, APIs and virtual currency

30 May 2014  |  9147 views  |  1 London skyline - old Natwest tower and gherkin

The Financial Conduct Authority is looking to foster innovation in the UK financial services industry by setting up a policy hub to provide guidance to firms on new products and technology developments and an 'incubator' to fast-track startup businesses for regulatory authorisation.

The watchdog has launched a new programme, dubbed Project Innovate, with the aim of ensuring that positive developments in areas such as mobile banking, online investment or money transfer, are supported by the regulatory environment.

Outlining the approach at a conference hosted by Bloomberg on Thursday, FCA chief Martin Wheatley, pointed to the booming tech scene in London and the emergence of firms such as WorldRemit, Monitise, TransferWise, Nutmeg as evidence of a new wave of innovation in financial services

"What has become increasingly obvious, as the dust settles on this latest wave of progress, is that it's an imperative for regulators to be standing on the right side of progress," he says. "We want an FCA that creates room for the brightest and most innovative companies to enter the sector. The possibilities opening up for consumers are extraordinary - and it's clearly important they can be developed in the UK."

To help this happen, he says, the FCA is opening its doors to financial service firms who are developing innovative approaches that aren't explicitly addressed by current regulation - or where the guidance may be ambivalent.

This engagement has already begun with a number of start-ups, as well as organisations like Tech City UK and Level 39, coming in to talk to FCA policy teams.

The next step entails the creation of a scoping document exploring how innovation can be supported more effectively, focusing on the FCA's expectations of firms, as well as specifics around advice and support for businesses bringing new models of financial service to market.

In the meantime, the watchdog intends to open up a dedicated 'hub' in its policy team which will pull together FCA expertise to support the innovation ecosystem.

It will achieve this in two ways, say Wheatley: "First, by providing help to firms who are developing new models or products advice on compliance so they can navigate the regulatory system. Second, by looking for areas where the system itself needs to adapt to new technology or broader change - rather than the other way round."

On top of this, he says, the regulator will also be launching "an incubator to support innovative, small financial businesses as they ready themselves for regulatory authorisation".

The FSA's initiative comes as the UK Government re-affirmed its committment to breaking down barriers to entry for firms using innovative products and technology to challenge the established banking industry. This includes encouragement of peer-to-peer lending, opening up access to SME data and commissioning a feasibility study into the use of APIs for providing third party access to bank data.

HM Treasury says it also intends to address concerns about the application of the Money Laundering Regulations by banks, and in particular their use in denying access to banking services by firms trading in virtual currencies. To this end it convened a Private Sector Consultative Forum in March with banks, firms, regulators and FATF member governments to "enable a better understanding (of) the risks from virtual currencies and how these might be mitigated, including by banks".

Comments: (1)

Gerard Cavander - Ixaris - london | 04 June, 2014, 09:13

A great initiative by the FCA -  opening up the market to innovators in the payments space is long overdue. In order to effectively support innovation, the barriers currently facing emerging fintech firms -  notably lack of ready access to the banking infrastructure needed to realise their innovative ideas – must be addressed. Regulators here in the UK and wider EU are already starting to do this, with the proposed update to the Payments Services Directive (PSD) aiming to increase participation in the payments industry from non-banks to so called third-party providers and grant them access to this infrastructure. Gartner and other analysts are recommending it.  And yes, APIs will play an increasingly important role in helping third-party developers access these financial services.

But APIs are a technical tool and so powerful that they can only be given to trusted parties. In practical terms that will mean keeping development in the bank/FI. For wider innovation in payments and digital banking we will need something else. That’s why Ixaris are introducing PayML. We are believers in ‘open’ payments but  also appreciate the challenges banks face when it comes to opening up their systems while maintaining the highest levels of security we all want them to maintain.

PayML is a simple extension to HTML that enables web developers/enthusiasts  (not IT programmers) to work with payment solutions, selecting the function they want to make available, modifying to modern standard the form/layout of the user interface and the flow of the whole process for the target user – all without compromising security. Using PayML a web developer cannot access sensitive payment data but works with ‘placeholder’ tags only and therefore needs no access to the secure bank/FI environment on which the target payment solution will run. (Another technical approach is ‘tokenisation’ but it is not useful where interaction between a customer, a payment app/application and the relevant banking/payment system is required. It’s good for the most basic interactions like posting card details to the banking network, but no good for more complex interaction such as a consumer being able to act on real-time information like an account balance for example, and hence is quite limited. ) 

PayML will help take development of payment solutions closer to the user and alleviate some of the burden on and costs associated with the necessity of using IT to build, develop and deploy payment solutions or the current mainstream and alternative of inspecting the coding of all apps to ensure they are safe before use (difficult and expensive).

Gerry.cavander@Ixaris.com

 

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