During recent months, I’ve enjoyed a real ding-dong of conversations between Europeans, Asians, Americans and Brits about FinTech and, to be more specific, RegTech. RegTech is a couple of years in catch-up with FinTech, and is all about how to use technologies to make regulations more efficient and effective. The claim is that the UK leads the field in this space, but why would that be?
My claim is that it is because the UK Government and the London Mayor’s Office has made a real agenda and focus of making FinTech London and, more widely, Britain their leading platform. Bearing in mind that financial services delivers a double digit GDP and multi-billion dollar tax contribution to the UK economy, and you can see in part why this is important. But has this made any real difference when over half of the FinTech investments are in Silicon Valley, USA and Continental Europe is dragging its heels by comparison.
I guess the real difference is three discussions that took place in recent times: one with the White House, one with a Member of the European Parliament (MEP) and one with the Financial Conduct Authority (FCA).
The White House discussion was about decentralized, rules-based regulation and how that is preferable to centralized, principles-based regulation. Each state can pretty much do its own thing, unless it’s embedded in a lengthy law like Dodd-Frank. Dodd-Frank started out as an 850 page document but, after five years of discussion and fine tuning, is now almost 14,000 pages and 15 million words. Even with all that, there’s 40 percent still to implement and the legislation is creeping at the seams of insanity when it comes to interpretation and implementation. It is claimed that this is why the USA has not seen a single new bank start-up in the past ten years, except for a few community banks and the new Goldman Sachs digital retail bank.
Compare that to the UK, where almost 40 new banks are going through the regulatory sign-off process with Atom Bank being the first out of the gate. The FCA launched a new Project Innovate earlier this year with its first deliverable being a Regulatory Sandbox, announced in April. The Sandbox allows start-ups to test their ideas with the regulators before release on the general public, and engages FinTech start-ups so that they can get a basic license to offer under restrictions within just two months of application. That process is being copied in Singapore, Hong Kong, Dubai and other nations. In fact, there’s a competition growing between all these centres. By way of example, the Monetary Authority of Singapore (MAS) is trying to lead Asia as the Fintech focus centre, and have allocated USD$45 million per annum through to 2021 to attract start-ups to their City. I would say country, but Singapore in this context is like London, Hong Kong and New York, a bit City hub offering a global financial centre focus.
So we have all these centres competing to be Fintech hubs with regulatory support, but the USA and Europe are more retrospect.
Europe, like the USA, prefers rules-based regulations in general, and would limit start-ups from getting licences too fast. Having said that, Europe is also somewhat innovate with the open sourcing of bank data under Payment Services Directive 2, PSD2 for short, that forces banks to make their data accessible to Trusted Third Parties via open Application Program Interfaces (APIs). Americans don’t like APIs or, to be more precise, American banks don’t like APIs or data access and are fighting against such openness through Washington lobby groups.
But the real test of Europe is whether it is stronger together or not. This is the test of the the Brexit, where we could see fragmented Fintech as a result. If the UK loses passporting to the Single Market for financial firms, where do London’s 1.5 million Fintech and financial employees go? Back office to Dublin, trading to Frankfurt and Paris, and innovation to Finland, Norway and Madrid. This is the danger of the Brexit challenge.
My MEP friend was saying that the fact a UK MP can stand up as part of Europe, and fight against the American interpretation of the Basel rules, is testament to the backing that the Union gives us and her. Together we are stronger was her message. It is an interesting message as, in evidence of our divisions, the UK’s rules and innovation structures designed to fast-track firms and create more competition, differ widely from those in Germany. As my German regulatory friend commented: you are more flexible in London. My FCA friend replied that we are more pragmatic.
Whatever your views, it is clear that regulation is as much a part of the financial market operations and attractiveness as liquidity and, in order to attract liquidity, regulators are trying hard to create an open, simple and accessible environment for both incumbents and start-ups to operate. London and the UK is clearing in the front of field in that debate. Will the rest of Europe and America catch-up or will we see the errors of our pragmatic ways?