Fintech, or financial technology, is booming in Britain right now in part thanks to support from the government and regulators.
Millions are flowing into startups doing everything from peer-to-peer lending and crowdfunding to crypto currencies and payment technologies. The government has appointed a fintech Tsar and headed several international trade missions to bang the drum for the sector abroad.
But the man charged with overseeing the regulation of the slew of startups in the space fired a warning shot on Wednesday, signalling that the Financial Conduct Authority (FCA) won’t let standards slip just because the sector is “hot” right now.
Bob Ferguson, the head of the FCA’s Project Innovate, said in a speech to the Westminster Business Forum on fintech on Wednesday:
I’m still a regulator. Being innovative is not some kind of universal solvent that does away with the need to observe requirements that are there to safeguard consumers or to safeguard the integrity of financial systems. Innovation is not a licence to cut corners.
He elaborated on what exactly he meant later on in his speech, saying:
I want to stress again the importance of not throwing the baby out with the bathwater. Innovation can redefine the relationship between consumers and businesses, often by disintermediation. That switches risks and responsibilities, often in the direction of the consumer. That is something else the regulator has to keep a very close eye on in the interest of consumer protection.
Business Insider cornered Ferguson after his speech to get more details, but he told us all inquiries need to go through the FCA’s press office. We’ve reached out to them and will update if we hear back.
Still, it’s not hard to read between the lines.
One of the big selling points of many fintech startups is that they reduce costs by cutting out the middle men, usually the banks — think peer-to-peer lending or crowdfunding.
But this also removes the benefits middle men bring. If the person you lend money to through an online platform runs off or the company you invest in on a crowdfunding platform goes bust, you’re left with the losses. In the traditional financial system, the bank, which would be doing the lending, would shield you from these losses.
Ferguson clearly wants to make sure that there are appropriate safeguards to stop people abusing these new platforms and, as a result, ripping off consumers.
Project Innovate, the branch of the FCA that Ferguson heads, was set up last year to help provide startups guidance on regulation. It provides a halfway house between being totally unregulated and going through the long, laborious process of being fully regulated by the FCA. Ferguson says Project Innovate’s favoured method is the “informal steer.”
Despite some of the sterner sentiment in his speech, Ferguson is clearly a fan of fintech, saying:
Fintech innovation can lead to lower process and transaction costs and that, in turn, can lead to better value for money for users of financial services. It can also lead to better quality consumer experiences when they’re buying products and services — a convenience factor. It can also lead to new sources of finances for consumers and businesses, we’ve talked about peer-to-peer lending. And finally, it can lead to better risk management.
Ferguson’s point is simply we shouldn’t get carried away by the excitement and believe that new financial models enabled by technology are the silver bullet for all the financial system’s issues.
Project Innovate has worked with 177 companies since its launch, but also turned down 150 more. Ferguson says: “When that happens we try to do that as nicely and as quickly as possible. Some of those who come to us have been invited to engage with the FCA through the normal mechanisms. Some of those businesses are not as innovative as they crack themselves up to be.”