While regulators have a powerful influence in most economies – serving to manage the risks the financial system is exposed to – this is only part of their remit, declared Lewin in a MoneyFest presentation yesterday. In the last year alone, regulators have helped catalyse many collaborations and technological innovations within the financial services sector, for the benefit of many stakeholders.

There are two main ways regulators have been doing this:

1. Driving cross-border connectivity between regulators and fintechs

“Regulators have started to partner with each other, in order to promote cross-border connectivity between regulators and fintechs, within their respective jurisdictions”, said Lewin.

GFIN

The Global Financial Innovation Network (GFIN) initiative, launched in January 2009, is one such example. The brainchild of the UK Financial Conduct Authority (FCA), GFIN expands the notion of a regulatory sandbox, to facilitate testing across borders.

As a network of over 60 organisations – comprised mainly of national regulators and central banks – the GFIN’s mission is to provide a more efficient means for innovative firms to work with regulators across the world; especially when looking to test new ideas, and scale up. The GFIN makes the process easier by requiring firms to apply only to one central body when testing their financial products in more than one country.

Despite being an ambitious mission, GFIN ran a highly successful pilot in 2019, and published its findings in January 2020, in the “Cross-border testing: Lessons Learned” report. Already, the GFIN has selected its next cohort, and plans to embark on a second wave of cross-border testing.

The UK’s bilateral fintech bridges

Bespoke agreements that outline partnerships between two governments, the UK’s bilateral fintech bridges are another example of regulatory organisations collaborating to provide connectivity between ecosystems. These projects facilitate information sharing on topics such as emerging financial trends, regulatory issues, and best practices.

The first ever fintech bridge agreement was signed in 2016, between the UK and Singapore, which included a regulatory co-operation agreement between the FCA and the Monetary Authority of Singapore. These agreements not only enabled regulators to refer fintech firms to their counterparts in the other jurisdiction, but also laid out how regulators plan to share and use information on financial services innovation in their respective markets.

The UK has since established fintech bridges with China, Hong Kong, Australia and South Korea, and has regulatory co-operation agreements in place with these geographies, as well as Canada, the US and Japan.

“The benefit of these fintech bridges is demonstrated by the UK’s agreement with Australia, which has recently helped 20 fintech companies – including Trade Ledger, OakNorth and Crowd2Fund – set up in the country”, said Lewin.

2. Promoting partnerships between fintechs and incumbent organisations

The second way regulators are promoting innovation within the financial services arena is by fostering collaboration between fintechs and incumbent organisations.

Regulatory sandboxes

One way regulators have done this is via regulatory sandboxes – the first of which was established in 2016 by the FCA. Today, there are some 73 sandboxes, across 57 jurisdictions, that have either been announced or are operational.

In the UK, 140 companies have participated in the FCA’s sandbox to date, including brands such as the Post Office, Barclays, Aviva, as well as a number of new and innovative fintechs.

“Sandboxes are useful for promoting business partnerships, due to their eligibility criteria. For instance, in some cases, the requirement for entry is that a fintech must partner with an already licenced firm. This happened between HSBC and Pariti, who partnered in the first cohort of the FCA’s sandbox to trial an app that helps retail customers manage their finances”, pointed out Lewin.

Open Banking

A discussion about the invaluable role regulators play in the financial services sector would not be complete without mention of the second Payment Services Directive (PSD2), added Lewin. “Arguably, PSD2 was the single biggest piece of regulation that has not only helped to shape the fintech ecosystem as we know it today, but one that has almost forced partnerships on incumbent players.”

Partnerships like the one between BNP Paribas and Token, announced on 20th April 2021, reveal how PSD2 continues to shift the discourse around the relationship between fintechs and incumbents from one of competition, to one of collaboration.

Supporting regulators’ invaluable role

Now more than ever, regulators are embracing their facilitative remit, and using it to understand and foster progressive innovation. This work is creating opportunities for entrepreneurs and global financial institutions to collaborate in ways that could not have been foreseen even a decade ago.

For these reasons, argues Dr Sian Lewin, it is time for us to reimagine the role of the regulator.