Nick Cook, Director of Innovation at the FCA “The world we are living in is changing rapidly, no more so than in financial services. The way we pay our bills, the way we choose our financial products, the way we consume financial services is almost unrecognisable from just a decade ago. Much of this change has been driven by the data revolution which means that firms now know more about their current and potential customers than ever before, allowing them to create increasingly bespoke products and experiences.”
However, as we know, ‘with great power comes great responsibility’. Increasing personalisation can result in people being left behind. While lower prices for lower risk can seem a desirable outcome, the converse of consumers deemed ‘high risk’ being priced out of insurance or prevented access to credit is an often unwanted and unintended consequence.
This changing landscape reminds financial regulators that we have to continually adapt to remain fit for purpose. Not only for the markets and the firms that we oversee, but for the consumers we serve to protect. It also reminds us of the need to continually focus on outcomes. To not get lost in rabbit holes of detail or swept away in the flood of the new, but to focus on the end-result – on what we would like to see happen. And finally, it reminds us that we have to anticipate what might next be coming down the road and to shape rather than be shaped by the inevitable next wave of change.
I’m going to talk about 2 areas today – our innovation services in general, and RegTech specifically – where we are currently doing some thinking about how we can build on what we have already achieved and ensure that we will remain fit for purpose in the future.
Innovation services and a targeted approach
As many of you will know, our Sandbox and broader innovation services have been in existence for around 5 years now. What literally started as a 2-person initiative called ‘Project Innovate’ offering regulatory feedback to innovative business models has grown into an entire innovation division dedicated to bringing disruption to financial markets in the interests of consumers.
It’s important that we don’t rest on the laurels of our achievements. I’m a lot more interested in what we haven’t so far achieved
Over those 5 years, around 700 firms have used these services – Sandbox, direct support and the advice unit. In terms of the sandbox, of the 47 firms that have completed sandbox testing, around 80% are operating in the market with a further 60 in the pipeline. We recently carried out an evaluation of the effectiveness of our innovation offering and overall I would say that we are pretty content with what we’ve been able to achieve in terms of helping new ideas get to market more quickly and start-ups getting funding or being acquired.
However, I think it’s important that we don’t rest on the laurels of these achievements. In fact, I’m a lot more interested in what we haven’t so far achieved. While we have undoubtedly seen new offerings and players entering certain areas of the market – retail banking being a prime example – we have seen significantly fewer offerings for other sectors like asset management and retirement savings. And we haven’t really seen true disruption at scale, with big and mid-size players not being avid consumers of the Sandbox in particular.
The simple reason for this may be that the Sandbox isn’t really relevant to their needs. That it doesn’t offer supply to a demand. But this leads to the question – do we need to make certain enhancements to our services to broaden their relevance and appeal? Do we have to adapt the model to ensure it is fit for more purposes and needs than it currently is?
One of the ways we are looking to broaden the variety we see coming into the Sandbox in particular is by encouraging developments in certain areas of regulatory interest – trying to ensure that the Sandbox helps to produce certain desirable outcomes that we think are important. We opened cohort 6 of the Sandbox couple of weeks ago by specifically calling out propositions that:
- make finance work for everyone through addressing issues such as access, exclusion and vulnerability
- support the UK in the move to a greener economy by responding to the challenges posed by climate change
- use technology to overcome regulatory challenges – by helping regulated firms comply with their obligations
I’ve already discussed the unintended consequences that technology and change can have on some of the more vulnerable people in society so we think it important to try to ensure as much as is possible that technology acts as a force for good. Similarly, we feel that as a regulator we have an important part to play in the fight against climate change, following on from our first ‘FinTech challenge’ focusing on green and sustainable models held last year.
RegTech and digital sandboxes
The third area of focus, RegTech, has been, in my opinion, a key ‘underserviced’ area of the Sandbox until now and another area where we have to think if the services we currently offer marry up to the needs of firms. While the RegTech market is growing – investments more than doubled between 2017 (in excess of £1,435.4 million) and 2018 (in excess of £3,447.7 million) – I still consider it to be the sleeping giant of the financial services world. The reasons for this untapped potential are undoubtedly manifold and several beyond our gift to remedy, for example the length of sales cycles and complexity of information technology systems in many of the larger institutions who are potentially significant consumers of RegTech. However, there is perhaps one key area that we may be equipped to address.
We know from our discussions with RegTech firms, and through the TechSprints we have run, that a key struggle for RegTech solutions is making the step from Proof of Concept to Proof of Value – being able to demonstrate to these potential customers in the financial services industry that your solution not only works, but may provide a more efficient and effective way of doing things than they are currently done. In other words, to develop trust in your solution and develop the business case for deployment and implementation – to justify the security, procurement risk and cost requirements that these involve.
Digital testing environment
We have also heard from RegTech firms that a missing rung in the ladder to market is the lack of access to high-quality synthetic data assets against which to test new technology solutions. So, one of the things we are currently looking at and beginning conversations around is what that digital testing environment might need to look like, what role we ought to play in supporting its creation, and whether it could be something that could be scaled across jurisdictions.
We already have a bit of experience on this front in terms of the way we run TechSprints, essentially creating an ephemeral ‘digital sandbox’ where very focussed proofs of concepts can be tested and then demonstrated to industry for a very finite period of time, with the environment itself usually only being in existence for a week or so. We have received great engagement from RegTech firms at the TechSprints we have held in recent years, so feel that exploring a permanent, data-rich testing environment is something really worth pursuing.
As well as calling out 3 outcomes that we would like to see people with ideas bring forward in Cohort 6, we also mentioned 2 specific technologies that we are interested in firms exploring the potential of. I mentioned at the outset the need for regulators to anticipate what might be coming next, to identify early the potential actors of change and be on the front foot rather than reactive.
This is a tactic we employed at our recent Global AML and Financial Crime TechSprint where we specifically brought tech firms and the industry together to explore the potential of Privacy Enhancing Technologies to make improvements in the area of financial crime detection.
The first of these technologies is ‘federated learning’ or ‘travelling algorithms’ which potentially allow entities to develop and refine more performant algorithms which are trained on multiple data assets without bringing those assets together. We recognise this is a nascent field and are keen to work with innovators to explore its potential further.
The second area is ‘complex scenario modelling and scenario simulation’. This is basically a fancy way of saying that we’d like to see how graph analytics, behavioural science and deep learning can be used to better model relationships, connections and behaviours in financial markets. And to then test various simulations and scenarios against these models’.
We should be aware that standing still is effectively running backwards so continually look to improve the services we offer.
For regulators, this could mean understanding with greater precision the impact of planned or potential policy interventions. For firms, this could help them ensure that the products they are developing don’t pose any unintended risks to certain customer groups, such as vulnerable consumers, before they are released into the market.
These will not be the only occasions or areas where we call out specific issues and problems to which we would like to see further innovation and progress.
Global community of regulators
In this age of rapidly developing and accelerating change in financial services, it’s important for regulators to understand that technology is both the architect of, but also the solution to, the new challenges we face. We must embrace innovation in order to shape it. This will require adjustments to some of the ways we have traditionally thought and acted.
We should be aware that standing still is effectively running backwards so continually look to improve the services we offer. And most of all we have to be humble enough to realise that we can’t achieve our goals alone. In a digital world and future, where physical borders are increasingly irrelevant to how business is done, we have to be part of a global community of regulators seeking to bring about disruption on an international scale.
The recent announcement that 4 federal US regulators – the Commodity Futures Trading Commission (CFTC), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC) and Securities and Exchange Commission (SEC) – have joined the Global Financial Innovation Network (which we have the honour of chairing) demonstrates this global direction of travel and reiterates the enormous potential for the collective to shape and transform the future.
Source: https://www.fca.org.uk
