The UK’s financial services regulator deserves credit for the way in which it has proactively sought to support innovation. The Financial Conduct Authority’s determination not to get in the way of technologies that promise huge benefits to consumers and providers alike is one reason why the UK’s fintech ecosystem has flourished. All the same, there are those who wonder whether the FCA has bent over backwards just a little too often.
This is not to denigrate initiatives such as Project Innovate or the regulatory sandbox. It would be all too easy for regulators to stymie innovators harnessing the power of technology to offer new solutions to problems that the traditional financial services industry has never satisfactorily been able to resolve. The role of a regulator should be to serve the interests of those whose behalf it regulates on – getting in the way of better products and services would hardly fulfil that duty.
That dilemma lay at the heart of the Financial Advice Market Review (FAMR). Having introduced reforms intended to safeguard consumers’ interests – the retail distribution review that enshrined independent financial advice as the gold standard – the FCA came to realise its work had been counter-productive, because the unintended consequence of RDR was that fewer people actually had access to good-quality advice. Hence the FAMR and its proposals for addressing that problem.
Nevertheless, the regulator has a responsibility to enforce its own rulebook. And there is now a danger that in its anxiety not to be seen as a bar to innovation, the FCA is not doing enough to ensure those it regulates are complying. The regulator rightly values its hard-won reputation as a friend of invention, but that shouldn’t mean it turns a blind eye to breaches of the rules.
Take, for example, the question of robo-advice, where an increasing number of innovative businesses are now competing for the attention of investors. The problem is that as we stand, regulation doesn’t allow many of the tools of the trade of robo-advisers. For instance, robo-advisers want to be able to provide illustrations of what investors’ contributions to a given asset allocation model might be worth in the future. One obvious way to do that is via back-testing – looking at the returns such models have generated in the past and then projecting them forward. As we currently stand, however, that isn’t allowed under the regulation, which forbids any suggestion that past performance is a guide to the future.
Several platforms are, however, getting away with doing exactly that. And maybe that’s not surprising given that that these services are effectively trading on the basis of a broader laissez-faire approach to regulation from the FCA. Its rulebook prohibits any independent advice model that isn’t based on a full and personalised fact-find – yet some robo-advisers are trading as providers of such advice without meeting this requirement.
That’s not an attack on such advisers, by the way – or even a call for the regulatory authorities to take action against these firms. It’s simply an observation: the FCA has opted to give new players in financial services a much greater degree of latitude than more established businesses are used to.
That’s understandable, of course. But it may also prove problematic. Not so much because there is scope for consumer detriment here, though that is always a possibility, but more because when rival businesses don’t know exactly where they stand from a regulatory perspective, they end up competing as much on their willingness to push the boundaries as on, say, quality of service or price. The dominant fintechs in financial services may end up being those that were most comfortable with relying on the regulator taking a more relaxed approach to enforcement. That hardly seems fair on competitors that take the rulebook at its word.
One problem has been that the FCA is scrambling to develop regulation in response to innovation, rather than getting ahead of new developments. That’s inevitable to some extent – by definition, it is tough to predict the direction innovation will take. But the regulator does need to move faster to offer definitive rules in these areas. For consumers’ sake, of course, but also to provide a level playing field where innovators know where they stand.
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