Do regulators hold the key to FinTech success?
November 2015 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
Global investment in financial technology (FinTech) businesses tripled last year from $4bn to just over $12.2bn. This figure is predicted to hit $46bn by 2020. These eye watering figures help explain why FinTech is currently the fastest growing of all fast-growth sectors.
As ever with technology-driven fast-growth businesses, Silicon Valley currently leads the way in absolute terms in attracting FinTech investment ($2bn in 2014 compared to $1.48bn invested in Europe as a whole). However, the UK (and in particular London) is also at the forefront of this boom. Recent data suggests that there are more people working in the FinTech industry in London than in either Silicon Valley or New York.
The most critical factor in London’s current position in the world’s FinTech landscape is undoubtedly the geographic coincidence of its growing status as a technology hub and its place as one of the world’s leading financial services centres. This gives London a unique advantage over New York and Silicon Valley, which can lay claim to one, but not both, of these vital characteristics. It is interesting however, that London’s FinTech industry is currently so far ahead of other world financial centres such as Hong Kong and Singapore, which can also boast a thriving community of software developers and an entrepreneurial culture.
The power of regulatory support
A good deal of credit for this must go to a variety of institutional players who have recognised the opportunity the UK has and moved quickly to provide much-needed momentum. Some of the biggest plaudits must go to the UK’s financial services regulator, the Financial Conduct Authority (FCA). The FCA has taken uncharacteristically speedy steps to do what it can to reduce the friction that might otherwise have held back certain areas of the UK’s FinTech industry. It is significant that the FCA is currently leading the way among financial services regulators in other jurisdictions in grappling with some of the unique issues being thrown up by the rise of these new and disruptive business models.
One of the best examples of this are the steps the FCA took last year, with support from HM Treasury, to regulate the peer-to-peer (P2P) lending industry. This required considerable lobbying from the founders of the UK’s leading P2P lenders but in relative terms, this still marked a swift response from key institutions to address a threshold issue that risked affecting the UK P2P lending industry’s prospects for growth. Along with the new regulation, the UK government announced tax efficiencies for P2P lenders and introduced requirements for mainstream banks which are unable to lend to small business to refer them to alternative finance providers. This has helped contribute to the significant growth in P2P lending in the UK. As a next step, the FCA is exploring the feasibility of a ‘regulatory sandbox’ which would enable both small and large FinTech business to experiment with innovative products, services and business models without immediately incurring the normal regulatory consequences.
Even more radical was the FCA’s decision to launch a ‘start-up’ service of its own in October 2014. The FCA’s ‘Innovation Hub’ provides informal feedback to innovative FinTech businesses on the regulatory implications of their business models. The Innovation Hub is specifically designed to enable innovative financial services and products to be introduced to the market in an efficient way through a flexible regulatory framework. Crucially, the Innovation Hub enables early-stage businesses which qualify for its support to get an ‘informal steer’ on how the UK’s regulatory regime may affect their business. In certain cases, FinTech businesses can also now obtain support through the regulatory approval process. This service was the first of its kind among financial services regulators anywhere in the world. The Australian Securities and Investments Commission has since set up its own ‘Innovation Hub’ along similar lines, but so far no other regulator has followed suit.
Hong Kong and Singapore lagging behind
There are, inevitably, other factors at play, but the fact that the regulators in Hong Kong and Singapore have not yet embraced the FinTech revolution in the same way as the FCA may well explain in part why those financial centres are lagging behind the likes of London and New York.
Hong Kong has yet to introduce any regulation which specifically addresses FinTech businesses and, as things currently stand, there are a number of aspects of the Hong Kong regulatory regime which are likely to impact FinTech growth. For example, in 2014, the Securities and Futures Commission issued a notice reminding parties participating in crowdfunding or P2P activities that a number of securities laws and regulations could apply to such activities.
Encouragingly, things are beginning to happen in Singapore. On 27 July 2015, the Monetary Authority of Singapore announced the formation of a new ‘FinTech & Innovation Group’, in addition to its commitment of S$225m over the next five years to provide support for an ecosystem which encourages innovation in financial sector technology.
An international approach
The narrative on industry and regulation working together is growing, including on an international level. The UK FCA’s Innovation Hub has stated its desire to promote pro-innovation regulation to international standard setters. It is also undertaking a programme of relationship building missions with financial services regulators in other key jurisdictions to help foster cooperation on FinTech related issues. This collaborative spirit was echoed by Greg Medcraft, chair of the International Organisation of Securities Commissions, in a speech on 16 September 2015, in which he emphasised the importance of industry and regulators working together to “harvest the opportunities from digital disruption and financial innovation”.
Provided they do not result in regulators taking an overly relaxed approach to their ultimate responsibilities, these sentiments bode very well for the future of the FinTech industry worldwide.
Angus McLean and Ian Wood are partners at Simmons & Simmons LLP. Mr McLean can be contacted on +44 (0)20 7825 4142 or by email: firstname.lastname@example.org. Mr Wood can be contacted on +852 2583 8316 or by email: email@example.com.
© Financier Worldwide
Angus McLean and Ian Wood
Simmons & Simmons LLP