Regulatory reform essential for Fintech innovation

Jeegar Kakkad, Director, Government Innovation at the Tony Blair Institute for Global Change

The next government must make “regulatory certainty” a cornerstone of the financial services regime, amid concerns that regulatory stagnation and regulator resource limitations are having a detrimental impact on the development of Fintech companies and innovative products and services, according to a report produced by the Tony Blair Institute for Global Change in collaboration with the Startup Coalition.

The report’s authors, including Jeegar Kakkad, Director, Government Innovation at the Tony Blair Institute for Global Change, say they identified “growing pangs of uncertainty crop up in conversations with founders and investors, which is anathema to growth”, and highlight that “in order to attract investment, to market effectively, and plan ahead, startups require stability.”

“We’ve heard a desire from Fintechs and other stakeholders in the sector for stability and predictability to be embedded into the financial services regime,” the report states.

In its section on regulatory change, the report says a future government should provide more substance to the Consumer Duty, to create more certainty over what is expected of firms.

Creep and market distortion

A Progressive Vision for Fintech cautions against viewing Consumer Duty as a “silver bullet, particularly if it becomes a moveable feast”, and note the concept presents a challenge to policymakers and industry.

The report states: “We do not believe that the goal of the Consumer Duty is to remove all risk from financial services, and it is therefore imperative the regulator accommodate an environment of innovation where ‘good outcomes’ work within inevitable financial services risk. We’ve heard from firms that, today, this balance is not being struck, and there remains significant uncertainty over compliance with the Duty.

“For instance, there are concerns that the Consumer Duty will be used to define ‘price outcomes’ for consumers, which would amount to scope creep and market distortion.”

There is also concern that the Consumer Duty could increase barriers to entry for smaller firms if compliance is deemed to equate to extensive (and expensive) controls for perceived consumer risk which may not come to pass.

“If compliance with the Consumer Duty means different things at different times, this presents a regulatory risk to Fintechs, which will practically entail more cost in monitoring FCA requirements and then updating processes.

“To mitigate this risk, it is vital that best practice is frequently shared, that guidelines are updated, and that the FCA facilitates proactive engagement from firms in a constructive and collaborative way,” the study points out.

Capacity constraint

The report calls for a formal mechanism for dialogue between the regulator and Fintechs in order to develop best practice in a more agile manner.

It also cites frequent concerns about financial regulator capacity, which it says has become a more prominent challenge post-Brexit, with the onshoring of all financial services regulation.

“While the prospect of doubling down on outcomes-based regulation grounded in the Consumer Duty is excellent in principle, in reality this means placing even more onus on the FCA to police ambiguity. Many firms that we engaged with as part of this project do not think that the regulator is sufficiently resourced to take on more work,” it notes.

Fit for purpose

The under-resourcing of financial regulators also risks undermining any Brexit dividend that could be achieved in the financial services sector; if the regulators cannot effectively enforce existing regulations, they have little chance of being able to strategically innovate to compete with the EU and other jurisdictions.

In tandem with this, the report cites evidence that the “inconsistent judgements and the increasing scope creep of the Financial Ombudsman Services (FOS) are compounding uncertainty.”

“If fintechs cannot be certain that the regulators are fit for purpose, this fundamentally undermines their ability to plan, develop products, attract investment and grow,” it states.

In its final section, the report calls for any future government to commit to introducing Open Finance, described as a more comprehensive approach to open banking and sharing smart data, which it says “could revolutionise everything from loans for small and medium-sized enterprises to insurance. This would unlock a wave of fintech-powered solutions that reduce costs, improve cashflow and expand access to capital.”

Edward Peck, AFC CEO, commented: “This report underlines the risks associated with yet more regulatory creep – this time within the motor finance industry, into areas like price outcomes. It also emphasises how regulatory uncertainties are holding back innovation in financial services, to the detriment of the wider economy, including and especially SMEs who are particularly struggling to access flexible finance.”

AFC’s UK summer conference on 6th June at etc venues, County Hall, London will explore the current state of regulation in the asset and motor finance market. It also includes the regular FinTech Innovators session designed to showcase early-stage start-ups. For more details, visit the event website at