Regulatory Innovation Driving Better Financial Services For Consumers
Last week the Financial Conduct Authority (FCA), the principal regulator of the UK’s financial services sector announced a collaboration with 11 other global regulators and government entities called the Global Financial Innovation Network.
Christopher Woolard, the FCA Executive Director of Strategy and Competition commented, “The creation of the Global Financial Innovation Network (GFIN) is an important next step for organisations like ours who are actively engaged in understanding and harnessing the benefits of innovation in financial services for consumers, while managing the potential harm.”
So why is this an important development?
Digital innovations offer the promise of global borderless benefits for consumers and businesses.
While Amazon, Google and Facebook are now facing jurisdictional challenges around consumer data protection, market dominance, and the payment of tax, they have had relatively unfettered access to global markets for many years.
Financial services like banks and insurance companies are highly regulated with laws that vary greatly by country. This makes it difficult and expensive for digital innovators to scale outside of their own countries, an expense often borne by the end customer.
A new era of proactive and innovative global regulators has set out to improve this by working with digital innovators at the onset to help test that their solutions are fit for purpose and do not harm consumers. Part of this process is identifying upfront potential risks to the end customer like mis-selling, and mitigating those future risks.
GFIN can find its origins in the FCA’s Sandbox Report in 2015 which delivered the Regulatory Sandbox and the Global Sandbox Consultation, now resulting in the creation of GFIN. The FCA Regulatory Sandbox, launched in 2016, takes in cohorts of innovative firms from across the world with the objective of allowing firms to test innovative products, services and business models in a live market environment, while ensuring that appropriate safeguards are in place.
Woolard and his FCA innovation team have written the playbook on regulatory innovation in financial services and it has been copied by regulators around the world. At last count, there were over 30 financial regulatory sandboxes. The GFIN can help bring together this knowledge and experience to share and accelerate digital innovation in the financial service sector to consumers across the world.
A number of global regulators will join the FCA in the network: Abu Dhabi Global Markets (ADGM); Autorité des marchés financiers - Québec; Australian Securities & Investments Commission; Central Bank of Bahrain (CBB); United States Bureau of Consumer Financial Protection; Dubai Financial Services Authority (FDSA); Guernsey Financial Services Commission; Hong Kong Monetary Authority (HKMA); Monetary Authority of Singapore (MAS); Ontario Securities Commission; and Consultative Group to Assist the Poor (CGAP).
What a starting line up!
Richard Teng, CEO of the ADGM regulatory authority says, “Collaboration and supporting the growth of our stakeholders has always been at the heart of ADGM. ADGM is one of the earliest regulators to embrace Fintech and we have created many “firsts” in the MENA region, including the second most active regulatory sandbox globally. The GFIN initiative will allow us to provide even greater support to stakeholders and open the door to more innovation.”
One of the most attractive potential features of GFIN is to offer innovative companies’ access to and cooperation with a number of regulatory jurisdictions for their products. This is a key requirement in the emerging digital and crypto asset landscape with Tokenized Security Offerings (TSOs), Initial Coin Offerings (ICOs) and crypto exchange platforms.
Teng adds, “With GFIN, FinTech firms will have ‘regulatory connectivity’ to multiple markets at once. It is a powerful enabler to assist innovative firms in complying with multiple jurisdictions’ regulatory requirements and deliver safe and effective innovative products.”
ADGM has been a regulatory leader in the crypto space launching a framework for crypotocurrency activities in June that is designed to address the full range of risks associated with crypto asset activities, including risks relating to money laundering and financial crime, consumer protection, technology governance, custody and exchange operations.
Central bankers and financial services regulators in MENA and Asia are storming ahead with both digital and innovation at the top of their agendas. These are important regions to pay attention to as they are set to be some of the biggest consumer growth engines of the future.
Dubai is leading the transformation of its government services with Blockchain. "The DFSA has always been very active in the international regulatory work," says DFSA Chief Executive Ian Johnston, "The establishment of GFIN is yet another vehicle for the DFSA to join global regulators. We will seek to conduct joint work and share experiences on financial innovation, to improve financial stability and integrity."
MAS in Singapore is leading on digital identity and consumer data with MyInfo and a number of innovative initiatives too long to list here. I catchup with MASs' rock star Chief Fintech Officer Sopnendu Mohanty all over the world at industry forums, he is a legend! The HKMA in Hong Kong is forging ahead with open banking APIs and closer links with China through the Shenzhen community.
Bahrain has been relentless in it drive for innovation with the launch of Bahrain FinTech Bay, a USD 100m FinTech fund of funds, and a regulatory sandbox.
Mr. Rasheed Mohammed Al-Maraj, Governor of the Central Bank of Bahrain says, “The financial services industry worldwide is in a state of transformation. We believe that collaboration is a key ingredient to successfully adapt to this rapidly changing environment. The CBB's collaboration with the FCA and other financial regulators, regionally and internationally, through the GFIN, reinforces our commitment to create a thriving ecosystem for FinTech in the Kingdom of Bahrain and to further develop our regulatory framework in line with international standards.”
Having the Aussies along is always a plus, Jersey is a well know offshore financial center, and Ontario and Quebec’s participation says more about how things get done from a regulatory perspective in provincial Canada. GFIN is a great start, but runs a risk of appearing like the old colonial club to the uninitiated. It is great the US Bureau of Consumer Financial Protection is on board, but I would like to see the CFTC and the SEC join in along with ESMA, and where is Japan, India and China in the thinking?
The report on lessons learned from the FCA Regulatory Sandbox makes excellent reading for interested practitioners. Us geeks quite often get caught up in success measures like those from the FCA’s Regulatory Sandbox first cohort: reduced time to market, greater inbuilt safeguards, and greater access to capital for the cohort participant.
I would like to see GFIN focus on innovation measures directed to financial inclusion and social impact – financial innovation can do much more for consumers and society than create simpler, transparent and lower cost / better value products with safeguards.
Setting success measures for solutions that enable access to innovative products and services for a greater number of our citizens, to help them get to the end of the month would be a great start in many countries.
Innovators and industry associations can express theirs view of the GFIN’s mission and success measures. GFIN has set up a working group, which is asking for feedback on the consultation by 14th October 2018.