FCA Chief announces Project Innovate: Helping Firms Meet the Technological and Regulatory Challenge

The head of the UK’s Financial Conduct Authority, Chief Executive Martin Wheatley,
used a speech at Bloomberg, London given on 3 June 2014 to promote the FCA’s Project Innovate (the drafted text of Martin Wheatley’s speech can be read at http://www.fca.org.uk/news/making-innovation-work).  The FCA is the regulatory body that,
following reforms introduced by the Financial Services Act 2012, succeeded the Financial Services Authority. It has supervisory powers over the conduct of over 50,000 financial services firms in the UK, and authority to regulate the prudential standards of those firms not covered by the Prudential Regulation Authority. The PRA regulates deposit takers, insurers and significant investment firms.

Project Innovate is intended to allow financial services firms to develop innovative products for consumers.  This has been generally well received, with Wheatley describing Innovate as “an agreement to grant waivers to products that do not necessarily follow FCA guidance to the letter” where firms can show better outcomes for consumers.  Part of the driving force behind Innovate,
which will resonate with business leaders across the UK, is to prevent good products from drowning in the “overwhelming red tape that is inevitable as we introduce more regulation, not just at UK but at a European level.”

Describing the need for regulators to keep pace with new technologies, rather than – as present – running to catch up, and a desire for a regulatory environment that supports innovation rather than acting as an entry barrier, Wheatley singled out mobile banking, online investment and money transfer as priority areas, and the emergence of London-based innovative companies such as WorldRemit,
Monitise, TransferWise and Nutmeg. Wheatley went on to cite digitalisation, big data analytics, venture capital, virtual currencies, crowd funding and peer-to-peer as important, transformational areas.

Smaller firms and start-ups can, in particular, be expected to benefit from the Innovate approach which will encourage collaboration with the FCA in order to develop new technologies that are compliant from day one, with a regulatory environment that, instead of acting as a “drag anchor” supports innovation and encourages the “brightest and most innovative companies to enter the sector”.
Whether this marks a shift in the FCA’s approach to digital currencies, such as bitcoin, remains to be seen, with the regulator so far having kept a wide berth.

It’s probably too early to call a trend (more evolution than revolution) but this initiative shows promising signs, with Wheatley recognising, and taking steps to bolster, London’s leading position in the European market in financial technology (Wheatley cites growth of global investment in financial technology having tripled over the 5 years to 2013 up to $2.9bn, with UK and Ireland the fastest growing incubators, developing at an annual rate of 74% since 2008,
compared with 23% in Silicon Valley).  A single paper and a wider FCA consultation on potential handbook changes are due later this year.  In the meantime, the FCA has started to engage with business including a number of start-ups and organisations such as Tech City and Level 39. It has “opened a hub”
in its policy team to pull together expertise and provide support to advise firms developing new models or products on compliance and how to navigate the regulatory system, and by “looking for areas where the system itself needs to adapt to new technology or broader change – rather than the other way round”. Wheatley also foreshadowed that a single paper combining all of these initiatives, and wider FCA consultation on potential handbook changes,
are due later this year.