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FinTech and the Regulator

As “senior chap” in the industry I often get invited by investors to presentations from new “start-ups” to give a view. As we all know it’s a very exciting time in the industry and innovation is being encouraged from all directions:

  • Regulators wish to introduce competition into the financial sector,
  • The digital revolution moving banking from the branch to mobile and the “internet of things”
  • Attractive investment schemes (such as EIS in the UK) to encourage entrepreneurial investment boosted by the high tax and low interest rate regime. You have to do something!

 Last week there was a very good event on FinTech and the regulator. Is “FinReg” a word?

I found that there was some naivety amongst some of the entrepreneurs, who seem to think that banking professionals have been sitting on their hands refusing to innovate for the past 20 years. My experience is that when it came to products that could squeeze the last margin out of deposited funds or developing synthetic instruments to create an apparent profit out of nothing, bankers have been extremely innovative. 

When these entrepreneurs have presented, you quickly realise that they may have found a need but have no idea about its practicality as far as regulation is concerned which might explain why that need was going begging in the first place!

The “FinTech” sector is exciting and has huge potential. It will make banking more convenient, transparent and hopefully more relevant to customers in all sectors especially in my area of payments, SME and mass affluent banking. 

At this particular event there was a call for the regulator to be more “tech savvy” which would be nice. I have heard this call many times before. A question to the panel asking, how does the regulator balance between the interests of innovation and the consumer irritated me a little in that the regulator in the UK as in most countries has three functions:

  1. Protect customers of financial services
  2. Protect the integrity of financial services sector and lastly to
  3. Promote competition.

The regulator wishes to encourage innovation to help with competition but they cannot be expected to have every bright young entrepreneur come in off the street to pitch their offering only to be told the error of their ways and expect free advice!

 There was discussion about the types of regulation over they years. Being a “FinTech start-uppy” event there were not very many years in the room, but I detected “Principles Based” regulation being blamed for the recent woes of the global financial markets.

 Prior to the “Rules Based” regulation there was a “Principles Based” regulatory regime, which relied on the market, participates being principled! “Principles Based” regulation worked successfully with but a few challenges in the UK until “The Big Bang”. It will be too contentious to go further than to say from that time on, the City of London moved to a more rules based regulatory environment.

What needs to be understood is that while rules may appear to be more robust. The principle approach is more effective because it is not black and white, it assumes one understands what regulator is trying to achieve and if you don’t you should not be running a bank. I mentioned the issue of banks not innovating over the last 20 years. Ask the regulator. Innovation was brought to bear against every single one of the above regulatory objectives listed above. Ask Andrew Bailey about the "culture of gaming" [the regulator] in the industry.

Neither principled-based regulation nor rules based regulation will work without principled industry participants. So we will get more rules and it is the rules that block innovation. After the “Credit Crunch” the regulators, I think unfairly, received a lot of criticism from the public on their “light touch” regime. Now I am hearing the FinTech community want them to relax some rules so that their innovation would work!

I personally would like us to move back to a more a “Principles Based” regulatory system like the one Canada inherited from the UK and Mark Carney used to run. It saw the Commonwealth Nation through the turbulent times of the Credit Crunch with their banks in rude health. As far as the FinTech industry is concerned, it is not difficult to understand the principles behind the regulatory rules so that at least you will be heading in the right direction. You may be even able to help the regulator apply technology in their supervisory role.



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