FinTech Regulation : Race to the Top

As the FCA confirms it is teaming up with Australian regulators to support FinTech firms, The Trade looks at how the UK’s regulation on FinTech compares with the rest of the world…

The Financial Conduct Authority (FCA) has teamed up with Australian regulators in a ‘world-first’ agreement to support FinTech businesses.

The agreement means innovative FinTech companies in Australia and the UK will benefit from further support from regulators when entering the market in both countries.

Regulators across the globe have been very supportive of FinTech companies, but some argue none more so than the UK’s FCA.

In October 2014, the FCA launched ‘Project Innovate’ which aims to provide a direct line of communication between new FinTech companies and regulators.

Christopher Woolard, FCA director of strategy and competition said at the FCA’s event on Fintech in February the project aims to “assist innovative firms to work with us.”

Woolard said: “Some tech start-ups are completely unfamiliar with financial regulation which can be daunting; larger firms are more familiar with regulation but often have complex questions about their new propositions.”

A spokesperson at the FCA explained to the Trade that despite the growing success of Project Innovate, “it’s essential we don’t stand still.”

He added: “We set ourselves an ambitious goal to create something practical and useful to foster innovation and are opening up the possibility of answering regulatory uncertainties through testing in a live environment. This will be known as the sandbox.”

Regulators globally are catching up with the FCA, and its position as the most progressive regulatory body around the world needs to be built on.

The Australian Securities and Investments Commission (ASIC) launched its own FinTech Innovation Hub last year and claims since the launch, requests by FinTech start-ups seeking assistance has soared.

Similar operations have come into effect around the world. In summer last year, for example, the Monetary Authority of Singapore (MAS) launched its Fintech and Innovation Group (FTIG).

FTIG aims to provide similar support to FinTech companies that the FCA’s Innovation hub provides.

At the time of its launch, the MAS said the FTIG will be responsible for “development strategies to facilitate the use of technology and innovation…”

Ravi Menon, managing director at MAS said: “The formation of FTIG is a serious commitment by MAS towards our vision of a Smart Financial Centre, where technology is applied pervasively to create new opportunities and improve people’s lives.”

FinTech Capital

A report produced by EY and commissioned by HM Treasury, said the UK is a “leading FinTech capital”.

The FinTech sector in the UK has grown exponentially since 2008, having brought in approximately £6.6 billion in revenues in 2015, and attracting £524 million in investment.

Head of digital, Jet Lali, at financial consultancy firm Alpha FMC, told The Trade: “Many people think of cities like San Francisco as the epicentre for technology businesses, but London boasts just as many experts as its American counterparts.

“A significant proportion of those working in technology in London specialise in financial services, which makes the UK the European, if not the global, hub for the FinTech industry.”

The UK’s strength in FinTech lies in its large and sophisticated customer base, good availability of business capital, London’s position as a trading hub and support from its regulator.

InvestCloud, a cloud-based solutions firm, recently looked to open up a European office as part of its expansion into Europe.

Vice president at InvestCloud, Andrew Lewis, explained the reasons behind why London was their prime location.

He said: “InvestCloud was looking to enhance our European footprint, and although we looked at several locations to expand, London stood out for us."

“The financial services sector in London is one of the strongest in the world. We know the growth we achieved in the US can be replicated here in London at a faster rate due to the high demand for digital client communications, management, and automation tools by institutions in the UK.”

However, EY’s report explains the UK’s position on FinTech is not assured in the long-term, “as other regions accelerate policy initiatives, specialist regions emerge and China emerges as a FinTech juggernaut.”

Regulators in Japan stifled the FinTech market with strict rules which are now set to ease. In May this year, investment restrictions in Japan are to be lifted in the hopes of freeing up the flow of capital for FinTech companies.

Despite being the world’s third biggest economy, Japan’s rules for FinTech have strangled any advances in the sector.

FinTech ventures raised $2.7 billion in China last year, according to CB Insights data. Japan’s FinTech ventures raised just $44 million in the first nine months of 2015.

EY drew up recommendations to enable the UK to remain as the global capital of FinTech. Building FinTech bridges, for example, to support UK FinTech expansions globally. Strengthening the UK’s talent pipeline with apprenticeships and work placements is another example.

Playing catch-up

The FCA in the UK are leading the way in terms of regulatory support for FinTech, which is one of the most important reasons for the UK’s reputation in the sector.

Alpha FMC’s Lali stressed the importance of the government in the UK. He explained how the government should “engage with the community,” and “inject capital”, which can make all the difference in the FinTech world.

He said: “The UK government is particularly supportive of the FinTech industry; they regularly engage with the community, have injected capital to encourage the growth of the so-called ‘Silicon Roundabout’ in East London, and champion FS technology solutions including Robo-Advice and Bitcoin.

“Many FinTech companies are start-ups so it also helps that the UK has one of the most favourable tax regimes for firms which are just starting out.” 

FinTech start-ups were given an extra boost when UK Chancellor George Osborne announced he was more than doubling rate relief for small businesses in his Budget 2016.

InvestCloud’s Andrew Lewis also highlighted the importance of government encouragement for FinTech firms, when the firm looked for a location for European expansion.

He said: "InvestCloud was encouraged by the British government’s promotion of FinTech, and its stance on tax relief for smaller companies."

Regulators and governments across the world are now playing catch-up with the UK.  

However, the recent news of the FCA’s partnership with Australia’s regulatory body for FinTech firms is set to strengthen this position even further. 

As EY said in its FinTech report, the FCA needs to expand and “build bridges” internationally to ensure UK Fintech is collaborative with other FinTech capitals.

The FCA’s plans for FinTech regulatory expansion are already well underway.

One year after the FCA’s Project Innovate was launched, proposals for a ‘regulatory sandbox’ that can allow FinTech firms to test new products and services without “incurring the normal regulatory consequences”, were published by the FCA.

The FCA says the sandbox will provide better services for users, further innovation and an increased range of products and services to market.

The scheme is part of the FCA’s plans to expand Project Innovate, with proposals on how it can work with the government and the industry “to further support businesses.”  

A spokesperson at the FCA told The Trade an update on the implementation of the regulatory sandbox will be announced later this month.

Jet Lali concluded: “Indeed, it is fair to say that the FCA, more than any other regulator, is proactively and positively seeking to create a favourable but wholly secure environment for the FinTech sector to flourish, as the UK seeks to gain a global dominance of this new subsector of financial services.

“In a few markets such as the UK and Singapore the regulator and business environment is already favourable for FinTech start-ups, but it would be helpful if international FinTech companies could scale more easily and this is where the regulator has a role to play.”

Future of Fintech

A recent survey by financial recruitment firm, Robert Half, revealed that 35% of financial services executives view New York as the biggest competitor to the UK’s reputation as the FinTech capital.

The biggest threat was identified by 44% of respondents as a lack of skilled professionals in the FinTech world.

According to EY, the biggest talent pool for FinTech can be found in California, with 74,000 professionals employed in FinTech. The UK follows closely behind with 61,000 FinTech professionals.

Commenting on the need for more workers with relevant skills, Robert Half’s vice president, Luke Davis said: ‘When attracting skilled professionals within the FinTech industry, the key is to use a dynamic resourcing approach with the right mix of innovative and specialised professionals.

“As the skills shortage continues to tighten, accessing professionals who are not actively looking for jobs can be the solution.”

A lack of skilled workers in FinTech could see some firms outsourcing the roles, as one company highlighted in EY’s report.

The company said: “In the UK, we need to find a way to develop more home grown tech talent — coders, developers and engineers — that starts with better training and awareness in high school. Otherwise, you’ll see more FinTechs outsourcing their needs for technical talent to Poland and Germany.”

EY listed strengthening the UK’s ‘talent pipeline’, as a must if the UK is to remain a FinTech Capital.

However, InvestCloud has not seen this shortage of talent, as Lewis explained: “London has a great network in terms of recruitment, as an example, we hired our first employee in January, with the intention of hiring a team of 20 by the end of this year."

With California, New York and Singapore chasing the UK for the top spot in FinTech, the government and regulators must keep on top of initiatives and support for FinTech firms to ensure the UK remains a leader.

The FCA are on top of this, as it seems they have cracked the balance between encouraging FinTech firms and protecting consumers.

InvestCloud’s Lewis concluded: "Regulators need to get the balance right, to create an environment which encourages firms to grow but protects consumers.

“The FCA has done a good job of getting this balance right. They are proactive and open about approaching FinTech firms for feedback or suggestions.”