Advancement versus bureaucracy - leading the charge on innovation

Posted: 27th November 2014

With the FCA making waves as a more ‘proactive’, ‘intrusive’ regulator, your firm may be concerned that ‘over-regulation’ is choking any possibilities for providing innovative financial products and services to your customers. The FCA has evidently gauged these sentiments, and at the end of October, announced that its ‘Innovation Hub’ was open for business and offering support to firms developing new products and launching pioneering ideas.

This announcement indicates a radical and purposeful change in the approach of the FCA. The regulator is publicly setting out its commitment to work with firms and support those initiatives where true customer benefits will result.

This will come as a great relief to innovative, yet-to-be-authorised start-ups who could now receive dedicated attention and resource, as well as to existing small firms who want to start showing the FCA they are serious about conduct risk.

Industry worries and impact

The FCA feedback statement, following its July call to the industry for input on Project Innovate, recognises that some larger firms in the industry are unhappy that their fees will fund the Innovation Hub; a function of the regulator they feel they are unlikely to receive direct value from.

Whilst these larger C1 and C2 firms have not been excluded, they already have named FCA supervisors, professional compliance teams, and the budget to appoint independent consultants. The FCA is therefore looking to “redress the balance” and give the primary benefits to those smaller firms in the industry who can show they have a ‘genuine need’ for support.

That’s not to say that the FCA won’t continue joining forces with larger firms to encourage innovation. They’re already doing plenty in this space in areas such as behavioural economics and the disclosure of information to customers – thereby showing its intention to be a proactive, pre-emptive and an altogether different kind of regulator.

Such positives can also bring a potential regulatory risk. By supporting innovation, the FCA could indirectly impact the business models of the larger firms, as evidenced by its commentary on helping new innovator firms get bank accounts, and thus hastening the speed at which banks may be required to change their processes. Great for customers, but firms would be well advised to have this risk on their radar. The FCA states that it won’t “interfere in legitimate commercial decisions by banks”, but the devil is in the detail and it remains a risk firms need to be aware of and plan for.

The Regulator’s risk

The ‘Innovation Hub’ sounds great, but an appropriate resourcing balance needs to be maintained between this and the FCA’s day-to-day authorisation, supervision, and enforcement work, as well as the market studies and thematics currently transpiring.

The eyes of the industry, and the larger firms in particular, will be firmly on the FCA and its skill in selecting the most appropriate innovations to support and the most deserving firms to escalate through the authorisation process.

Thinking innovation

The Innovation Hub truly demonstrates the FCA’s desire to move to a more flexible and pragmatic culture. It is the only regulator in Europe taking such a realistic approach to regulating firms rather than hiding behind tick box processes, rules and legal interpretations. In doing so, they are really demonstrating that they want to work with the industry, and by the same token, improve outcomes for all customers.

Innovation can mean products, processes, marketing or organisational initiatives, so for those firms willing to embrace this new regulatory culture, the rewards are certainly there for the taking.