Speech by Nikhil Rathi, Chief Executive, at UK FinTech Week: Levelling the playing field – innovation in the service of consumers and the market

Thanks to many of you participating in this conference, UK fintech has grown successfully in recent years, at the forefront of global innovation.

Its revenue rose to £11bn in 2019 – almost doubling in only four years and accounting for almost 10% of the global total. Already this year, we have seen over $1bn worth of investment into UK fintech.

This revenue growth and investment has been supported by and, in turn encouraged, changes in consumer behaviour.

Seven in ten of us now use the services of at least one fintech company. More consumers are adopting innovative ways of accessing financial services in the UK than in equivalent markets, for example using finance aggregator services to make it easier to save and manage outgoings.

This success in financial innovation has been enabled by regulatory open-mindedness; a trait not always associated with regulators.

So, why has the FCA taken this lead?

First, Parliament has given us a duty to promote competition.

The challenge for us is the balancing act required by the rider within our competition objective – in the interests of consumers.

The choice created by competitive markets is, in itself, not a social or economic good. It only becomes one when it delivers better or cheaper products, an improved or more tailored service, and pushes incumbents to fight harder to attract and keep their customers. Crucially, consumers must be armed with information they can readily understand to help them make the right choice for them.

In supporting innovation to deliver more competitive markets, another of our objectives is held in balance – that of consumer protection.

Innovation comes with risk. New products and new firms fail. They can take consumers’ money with them. As a result, we, as regulator, need to understand new ideas and stay close to innovative firms.

That is why, less than a year after the FCA was founded, we set up Project Innovate. This recognised that the financial services industry has high costs of entry, and so those wishing to join – with genuinely new ideas that support markets and provide choice to consumers – require additional regulatory support.

We have now supported over 500 highly innovative firms, around a third of those that applied.

137 firms have now also passed through the Sandbox, in which new innovative ideas are safely tested before reaching the market. Of those, over half successfully completed their test. And those tests that did not go as planned provided intelligence about what works and what doesn’t, without risk to consumers or markets.

As a result, there are products now on the market offering new ways to pay, insure and access advice. And to support the wider market, we have tested regtech solutions, for example how to manage the compliance in the issuance of digital assets or deal with anti-money laundering requirements.

This support for innovation has been matched by action to protect consumers and markets, where we believe the consumer or market benefits are few or unclear.

For example, while we can see how useful distributed ledger technology can be - indeed a number of products drawing on it have been through the sandbox - we have made clear our concerns about certain investments in cryptoassets, which rely on DLT.

Last year, we banned the sale of crypto derivatives to retail consumers because the majority lost money, despite significant price increases in the underlying assets.

We also warned that direct investment in cryptoassets is high risk, with few regulatory protections.

We have been blunt. If you invest, you should be able to afford to lose it all.

Continued support for innovation

In last month’s letter of recommendations for the FCA from the Chancellor, the FCA was asked to “secure the right balance between a financial sector that is globally competitive, works for consumers, and is secure over the long-term.”

As part of this careful balancing act, the Chancellor announced the FCA will be taking forward the Kalifa Review’s recommendation for a Scalebox.

Here, we are drawing on lessons from Project Innovate, which has shown that once authorised, firms continue to need higher levels of support from the regulator and, often, enhanced oversight.

By autumn, we will develop plans to create a regulatory ‘nursery’.

This will create a period of enhanced oversight as those newly authorised firms develop and grow used to their regulatory status.

Currently, firms gain regulatory status and are treated in the same way as a firm with a long track record. The regulatory nursery will keep us in close contact with firms immediately post-authorisation so we can provide support and, where we need to, intervene earlier to steer firms in the right direction.

Additionally, we will shortly begin allowing year-round applications for the Sandbox and better advertise the support we already offer those firms looking to build out their innovative offering.

We will help connect scaling entities with our international peers, through the Global Financial Innovation Network, which now includes over 60 organisations committed to supporting financial innovation in the interests of consumers. We will support scaling firms’ entry and growth in other markets and further develop cross-border testing of innovative products and services.

Working in partnership with the Corporation of the City of London, we will also refine the Digital Sandbox, successfully piloted last year and focus, specifically, on sustainability.

And on sustainability, we will continue to lead. Yesterday, I announced the appointment of Sacha Sadan as Director, Environmental, Social and Governance at the FCA. Sacha is a recognised leader in this field. Financial innovation is vital if we are to deliver net-zero economy. When he joins in the summer, Sacha will accelerate our work to encourage the development of a green, sustainable investment market, underpinned by investor protection and innovative use of data.

The transformation of the FCA

I also want the FCA to be a more efficient and effective regulator.

Our work during the pandemic – whether on lending or on business interruption insurance – has shown what we can achieve where we move quickly to address risk of consumer harm. What’s more, our focus over many years on firms’ operational resilience was vindicated by their ability to adapt to Covid restrictions.

To build on these successes, we have made significant internal changes – with a new structure and senior hires. These include Jessica Rusu as Chief Data, Information and Intelligence Officer, who joins the FCA latest this year from a fintech and has significant experience of data analytics from her time in online retail.

Supporting Jessica in the enhancement of the FCA intelligence function will be Ian Phoenix, who will arrive at the FCA fresh from helping lead the NHS’ digital response to Covid.

Tackling many of the issues we face – whether it is finding the needle of market abuse in the haystack of transaction data, mapping access to cash against consumer vulnerability, scraping the web for poor advertising or the quicker raising of red flags about those we regulate – relies on the innovative use of technology and data, in many cases drawing on lessons from others in industry.

But to meet our objectives over the long term requires us not only to improve our structure, technology and data analytics capabilities, but also to adapt our culture and our risk appetite, and for us to take innovative advantage of our powers.

Our powers – and how we exercise them – must also keep pace with innovation and changes in consumer behaviour. For example, in a low interest rate environment, we have seen a growing number of investors search for better returns online. Too many of these investment opportunities prove too good to be true.

We have called for the Government to take action to provide better financial protection for consumers online - I reiterate that message today.

Ultimately, online search and social media firms need to take greater responsibility for their role in connecting consumers with these investment offers.

In the meantime, I believe there are things we can do.

Previously, online platforms were exempt from the financial promotions regime. This exemption was removed when we left the EU.

We see no reason why different standards should apply to a search engine or social media compared to a newspaper.

If these platforms choose to display and profit from adverts for risky – and in some cases fraudulent – investments, they should also comply with financial promotions rules.

The influence these platforms have on investors is growing, especially with newer self-directed investors. Compared with more experienced investors, those with less than three years’ experience are more than twice as likely to rely on YouTube or social media for research or finding investment opportunities. Amongst that same group, only 2 in 5 believe that losing some of the money they invest is a genuine risk.

Consumers shouldn’t be subject to lower standards, or greater risks, because they find an investment online. We’re looking at how social media platforms are adapting to these new rules. If needed, we will take action. Consumers – and firms – benefit when financial promotion rules apply fairly to both digital and more traditional media.

We also need to make sure that our internal processes allow for quick action.

That is why we are currently reviewing how our Regulatory Decisions Committee functions. The RDC is the final decision maker on contested enforcement, supervisory and authorisation interventions.

We can allow firms to operate or not. We can, ultimately, take away people’s ability to earn a living in their chosen profession. The RDC, therefore, plays a vital role in ensuring our decisions are fair.

Our review asks whether decisions on authorisation or on supervisory interventions could be made in a more streamlined way. And, whether this would better enable quick, decisive action, particularly to prevent entry or allow removal from our markets of those unable or unwilling to meet our standards.

This, again, demonstrates the need to balance our objectives – allowing firms in to compete with incumbents, but providing for quick action against those that put at risk consumer protection or market integrity.

Conclusion

Critical support for innovation is written into the legislative DNA of the FCA. It is there in how we balance our objectives and in the remit set for us by government.

As a result, we must constantly seek to level the playing field; to help new entrants test innovative ideas and gain regulatory approval. This can do so much for consumers looking for easier, more intuitive access to services and new ways of transacting and investing, as well as supporting the future of the UK economy.

But to achieve truly fair, competitive markets in service of consumers we must be rigorous. Trust in our financial services can only be built by also levelling the playing field so those firms who play by the rules, who genuinely work in their customers’ interests, are not disadvantaged by those who can’t or won’t.

And we must continue to embrace innovation - in our structure, in our capabilities and in the use of our powers - if we are to deliver on our objectives for the long term.

Thank you.