As we come to the end of 2022 UK Fintech week, some of the key themes highlighted during the various sessions I attended this week.
FCA leading from the front (at least in rhetoric)
The FCA made clear this week that it understands that the UK financial services sector needs its regulator to be proactive and lead from the front. The FCA's vision is to be even more innovative, led by data and technology. More assertive to ensure consumer protection and market integrity and more adaptive to ensure that its rules support the FinTech community. It describes innovation as the "golden thread" that ties these qualities together. Some of the key topics the UK regulator raised this fintech week:
- Innovation Pathways - the FCA announced a new support service, 'Innovation Pathways', that combines and enhances its Direct Support and Advice Unit Services by providing bespoke regulatory support to firms with innovative business models. There will be a greater focus on sharing insights into the FCA's data and the support provided to firms.
- ESG - sustainable finance and environmental, social and governance issues are a key FCA priority. The FCA's latest Business Plan highlights its ambition to enable a sustainable financial future by supporting sustainable innovation. The regulator has introduced 3 new initiatives in this space – a Sustainability TechSprint, a Digital Sandbox Sustainability Cohort, and a Green FinTech Challenge. In May, the FCA will publish its Evaluation Report on the learnings from the Sustainability Cohort.
- Synthetic Data - a key feature of the Digital Sandbox is that it leverages synthetic data. Synthetic data is a privacy-preserving technique that expands the opportunities for data to be accessed and shared – a key building block for innovation. Having observed the utility of synthetic data through its Digital Sandbox initiative, the FCA published a Call for Input earlier this month to gather views and assess the potential of synthetic data to further spur innovation in the market.
- Crypto-focus - in May, the FCA will be hosting its first ever CryptoSprint, engaging with the industry to seek their ideas to inform its regulatory policy thinking. It expects this sprint to be the start of a programme of industry engagement working together with the sector to "develop a dynamic framework that supports innovation while protecting consumers". In September, the FCA will be holding a joint TechSprint with the Payment Systems Regulator on Authorised Push Payment Fraud focused on exploring solutions to identify and prevent this kind of fraud, for example through identification of suspicious social media advertising and scam promotions.
However, for all of these confident statements from the UK regulator, practical experience with the regulator has been less positive in recent times, with the fintech sector experiencing major difficulties with FCA resourcing constraints, backlogs and delays around the authorisation process. In February, the FCA indicated that it had hired consultants as it aims to cut the authorisation backlog while it recruits permanent staff. So hopefully we will see performance improve in the coming months.
Maintenance of UK's position as a key fintech hub
The sector is confident that we still have the know-how, size of market opportunity, legal tradition and sensible regulation and supportive regulator to attract fintechs to launch and grow. However, faced with the relentless level of change we have seen over the last few years, plus increasing competition and challengers around the world seeking to replicate the UK's fintech ecosystem, the sector cannot underestimate how important it is for the UK to continue to get the interplay and balance between innovation and regulation right. Many speakers highlighted the opportunity for the UK post-Brexit to come up with improved proportionate and outcomes-focused regulation.
In addition, many speakers raised talent as a key focus area to ensure continued growth and momentum in the UK fintech sector. Not only does the UK need to ensure we foster the right environment to attract talented people to travel and work here, it is vital that the UK invests in building grassroots fintech talent.
Crypto, crypto, crypto
Crypto has matured and was the focus of much discussion this week. The UK has put out its marker to become the leading global hub for crypto-assets and the FCA and Treasury announced various crypto-assets related initiatives, as discussed by my colleagues Dan Relton and Matt Vaghela).
- Embedded finance is another key trend and was a hot topic for discussion. Embedded finance has taken some time to mature, but industry commentators consider we now have the right mix of infrastructure, APIs and access to data and regulation to enable huge growth in this area. Plus customers are now more open to integrated payments - indeed, they are starting to expect these kinds of solutions. There is also reduced scepticism from brands. A broader proportion of retailers are now proactively focusing on embedded finance and identifying which partners they should work with.
- For incumbents, speakers agreed that they need to decide where to play, i.e. do they develop a platform or participate in platforms. They don't always need to be across the whole end to end, but need a clear strategy.
- Some of the quickest winners in embedded finance are likely to include existing digital media, gaming and workplace technology platforms who have an existing client base keen to reduce friction in payments.
- Most attention to date has been in consumer finance, but there is now increased focus on B2B solutions. Also, back-office solutions relating to embedded finance are under hyped - the benefit of these offerings is not necessarily visible to customers, but they will feel the benefits of improvements.
- We are starting to see a clear divergence between jurisdictions where regulators are supportive of embedded finance solutions and those that are not. This is a challenge for international fintechs who would really like to have harmonized regulation as much as possible so they can have consistency in their operations.
- Fintech is a team sport. Many business models and solutions (including embedded finance solutions) rely on partnerships and collaborations between companies in the broader fintech ecosystem. However, there is still too much friction when its comes to contracting, particularly between large incumbents and smaller players. Ultimately, for these arrangements to be successful, each side needs to understand the other party's key drivers and make sure, as much as possible, a win-win partnership of equals is created.
- For large incumbents under increasing pressure from regulators to ensure that they have a robust resilient supply chain, they will continue to push for their partners to demonstrate that, in addition to having quality products and services, they also have the right resources, robust governance and data and security controls to be an appropriate partner.
The FCA vision is to be even more innovative, led by data and technology. Ever more assertive to ensure consumer protection and market integrity. And ever more adaptive to ensure that regulation supports the FinTech community. Innovation serves as the golden thread that ties these qualities together.