Simon Collins: The future of fintech regulation

Simon Collins

There is no denying there are disrupters in town in the form of new financial technology firms and innovative service providers trying to reshape our traditional model. And it is not hard to see why. The financial crisis highlighted the deep levels of mistrust that had developed between bankers and the public, and the subsequent increase in regulatory scrutiny has seen costs for all financial services business rise.

The FCA has said it will support new entrants to the “fintech” market and is pro-innovation and competition in the interests of consumers. However, that does not mean the new landscape will be spared regulatory scrutiny.

The FCA’s Project Innovate is well underway, encompassing the use of a regulatory sandbox to provide an area for firms to road test new products and services. There is also the formation of the Advice Unit. The Advice Unit is the regulatory driving force behind the development of robo-advice – or “automated advice”, as the FCA likes to call it – to support lower cost models and consistent customer outcomes with a technology overlay.

The technological developments in financial services are not confined solely to business operations. Regulation is also developing, with “regtech” aiming to improve such areas as the way firms can better manage their data. Compliance officers and compliance teams need to look at how their areas of responsibility can keep pace with these developments, as well as the associated behavioural expectations.

But some things do not change. As FCA director of strategy and competition Christopher Woollard pointed out in a recent speech: “To be clear, automated advice models must meet the same standards as face-to-face advice, and the responsibility for ensuring their model meets the regulatory requirements rests with each firm’s senior management.”

The arrival of the Senior Managers and Certification Regime in March this year for banks, building societies and insurers is already focusing the mind and will no doubt be a topic of debate as the regime comes into force at all other firms over the coming 20 months or so.

Meanwhile, the FCA is currently part way through yet another suitability thematic review, with feedback expected later in the year. While these reviews develop, one of the challenges firms face is dealing with new products, which can sometimes be more esoteric or complex.

Advisers will no doubt be aware that firms currently holding the permission for “advising on investments” automatically had it varied to add the new regulated activity of advising on peer-to-peer agreements from 6 April 2016. This enables advice on the new Innovative Finance Isa.

The FCA stated “firms must, among other things, take reasonable steps to ensure that personal recommendations are suitable for their client”. Of course, firms can relinquish the permission if they do not wish to advise on P2P or crowdfunding. Those that are going to advise in this new area, however, will probably need to enhance their levels of competency in order to supervise the activity.

Future developments in financial services from a technology, product or service point of view is likely to be significant given the current encouragement from regulators.

But no matter how exciting these developments are, COBS 9 and Principle 9 are the critical standards firms must continue to meet where advice is provided. Being able to demonstrate suitability remains vital for all involved.

Simon Collins is managing director, regulatory, at Eversheds Consulting