Compliance is a fundamental and immovable base on which to successfully grow the fintech sector. At the same time, central banks and regulators realise they play a vital role in enabling innovation.
While regulatory authorities maintain dialogue with counterparts around the world, it has been suggested that cooperation is limited as each country competes to attract business
Partly as a result, regtech has emerged as an important innovation theme, complementing the growth of fintech.
Grow Advisors through its deep-rooted relationships with regulators, law firms and specialist advisors, is positioned to help firms navigate the regulatory environments.
Below we look at recent regulatory change in some of the leading financial capitals.
In May 2016 the UK's financial regulator, the FCA, launched their sandbox, as a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms while ensuring that consumers are appropriately protected. The regulatory sandbox is part of Project Innovate, an initiative launched in October 2014. It encourages innovation in the interests of consumers and promote competition through disruptive innovation.
The sandbox offers a range of options for eligible firms:
a tailored authorisation process (restricted authorisation) for new firms in the testing phase; individual guidance for firms testing ideas that do not easily fit into the existing regulatory framework and in some cases waivers or no enforcement action letters
Tracey McDermott, FCA acting Chief Executive said at it’s launch: 'Supporting innovation is an essential part of our role in promoting competition in the interests of consumers. Our aspiration is that the sandbox not only enables innovative ideas to be tested and brought to market, but also helps to reduce the time and the cost of getting them there.'
It is still early to highlight any particular success stories from the initiative, but it has spurred other countries regulators to rethink their approaches. Distributed Ledger Technology (DLT) based on blockchain, is one area the banking sector is examining closely. The sector is still in the conceptual phase and cryptocurrencies are at the leading edge. There is a realisation that much work needs to be done before for widespread institutional implementation. There will be compliance and regulatory issues that need to be resolved in this development.
In September this year, the Bank of England (BoE) explained that they are keen to support innovation. Victoria Cleland, the chief cashier of the BoE, stated the central bank's efforts in developing financial technology and admitted there is scope for the bank to ‘do more to meet the growing demands of consumers. We need to understand what FinTech means for the entities we regulate, how it might impact the overall safety and soundness of the financial system, and how it could alter the transmission mechanism for monetary policy. And of course for our own operations, through which we implement those policies', she said.
Hong Kong and Singapore
On the 6th September 2016, Hong Kong Monetary Authority (HKMA) chief executive Norman Chan announced that they will allow banks to experiment with new financial technologies that do not meet compliance standards. They too call the approach a Fintech ‘sandbox.’
It comes less than three months after his counterpart in Singapore proposed a similar programme that would allow financial institutions to offer new products to customers, albeit “within a well-defined space and duration
The HKMA announcement has been welcomed by some, partly due to a perception that Hong Kong is struggling to catch up with Singapore on fintech innovation.
'There is also a quite commonly held perception that the development of fintech in the financial services sector in Hong Kong has been slow,' Mr Chan conceded in his speech. 'I do not subscribe to this view, at least insofar as the banking sector is concerned.'
By permitting banks in Hong Kong to launch trials with new technologies before meeting regulatory standards, the authority hopes to allow institutions to gather data and feedback on new products.
'Regulatory assistance, or breaks, is the next step that will be very welcomed by start-ups who are already often overwhelmed trying to raise funding and build a business,' said Adrian Seto, director of the FinTech Innovation Lab Asia-Pacific in Hong Kong. He added that Hong Kong had been supportive of a fintech incubator for start-ups. His views reflect others’ who remain largely skeptical due to the absence of new rules that support fintech startups, rather than incumbent firms.
The Singaporean government has been a major supporter of Fintech innovation and the island state has become a hotbed for investment and hub for start-ups. The Monetary Authority of Singapore said last year that it would spend S$225m (US$166m) over five years to support the creation of innovation centres and technology projects within and across banks.
The sandbox announcement is the latest sign that Hong Kong realises it must keep up or potentially lose its crown of Asia's financial hub. Last year, Hong Kong established a fintech steering committee, and in March, the regulator established an office to promote fintech by organising industry events.
Australia has developed an innovation centre and are planning a regulatory sandbox for fintech firms, including areas to assist blockchain development. The Australian Securities and Investments Commission (ASIC) released a consultation paper, detailing proposals for a testing ground for innovative robo-advice providers and other similar services.
As far as innovation in financial services is concerned, Australian can be described as a lagging mature market. Authorities here are trying to catch up as other cities launch new ways to regulate
The sandbox will allow new entrants to test a service for up to 100 retail clients for up to 6 months without holding an AFSL. The service can only relate to advice and “arranging” for dealing, catering primarily to robo-advisers. Product issuers such as payment facility providers and marketplace lenders are excluded, as is advice about general and life insurance. Start-ups will not need to apply to ASIC to be admitted to the sandbox (unlike comparable sandbox arrangements in other jurisdictions), but may need to be vetted by a “sponsor”, such as a hub, co-working space or venture capital firm. A final regulatory position is expected by December 2016.
These are fast changing times for the financial services sector and the regulatory environments appreciate that they cannot hold back the tide. They must ensure they set out clear rules and requirements that enable the finance community to meet evolving customer expectations.
Grow Advisors, UK & Ireland
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