From Innovation Hub to Innovation Culture

FCA | Nick Cook, Director of Innovation | June 4, 2019

Nick Cook director innovation FCA - From Innovation Hub to Innovation CultureSpeech by Nick Cook, Director of Innovation at the FCA, delivered at the 6th Central Bank Executive Summit

Highlights

  • Technology is dramatically changing the markets that we regulate — we must embrace this technology so that we can continue to regulate effectively.
  • Regulators should actively stimulate certain innovation within the market that we believe will deliver public value.
  • A challenge for regulators is how to instigate a cultural change whereby innovative thinking becomes part of our ‘business as usual’.

Today I want to talk about innovation and a change in financial services. Specifically, I want to talk about how data and technology have and are, changing the way we regulate, the ways we at the FCA have reacted to and embraced that change and how this approach has evolved over time.

Also, I’d like to speak about what I think regulators and central banks will need to look like in the near future, the actions we will need to take, the resources we will need at our disposal and the type of culture we will need to create; a culture where innovation and new ways of approaching old problems are considered business as usual, rather than being undertaken in a ring-fenced or siloed function unique and distinct from the organisation that it sits in.

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Firstly, a little about my role at the FCA. Why does a regulator need a Director of Innovation and why now? The somewhat boring, operational answer, is that it is a natural next step in our innovation journey - bringing together the various innovation activities, both external and internal, that have grown and developed over time at the FCA into the one space. And that makes sense and it’s an area I’m delighted to lead.

My role is to help enable change — not only in the firms that we regulate and the markets that we oversee — but equally important at the FCA — so that we can continue to regulate effectively and achieve our objectives.

Obviously, there is a bit more to the role than that. Our CEO Andrew Bailey, recently said that regulation has traditionally been summed up by three verbs: to forbid, to require, to permit. In his view, a fourth verb should be added to this approach; to enable change — a regulator should enable change to happen that is consistent with its objectives.

This theme of change is present in our recently published business plan; a lot of which concerns itself with predicting what the future will look like, how we as a regulator have to think and act differently in anticipation of changes in the nature of firms we regulate; the pace of change of firms’ business models, consumers’ rising expectations for seamless digital services; Millenials growing preference for socially ethical products and; the emergence in our societies of generations with significantly different financial needs.

I’d therefore like to think that my role is to help enable change — not only in the firms that we regulate and the markets that we oversee — but equally importantly at the FCA — so that we can continue to regulate effectively and achieve our objectives. To protect consumers, to enhance market integrity and to promote competition.

Data and technology

The driver behind this need for change is in part the enormous and quickening pace of development and progress in the use of technology and data within financial services. The FinTech market is characterised by a number of key trends:

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  • The volume of investment in technology is increasing — Global FinTech investment is running at a rate of more than $80 billion a year. RegTech spending is predicted to exceed $115 billion within the next four years.
  • Large technology companies are increasingly entering financial markets. Apple Pay is forecast to have 227 million users by 2020. Recent research indicates that 40% of consumers are open to purchasing insurance from Amazon, and 39% from Google. Alibaba’s Alipay has more than 520 million customers in China and more than 112 million in other parts of Asia. WeChat, with its 1 billion active users, processes more than 14bn payment transactions in a single day.
  • The speed of adoption is quickening – the introduction of ATMs occurred over two decades. The take-up of contactless payment was significantly quicker. Since their introduction in 2007, 108 million contactless cards have been issued in the UK. The value of contactless transactions has tripled from £653 million in 2013, to £2.3 billion last year. This trend is mirrored across the world. In 2018, WeChat added 102.5 million users in a year, while in India 1.3 billion people have been enrolled in the Aadhaar identification system used to provide access to government services, social benefits, banking and insurance.
  • Technological innovation, particularly Artificial Intelligence (AI) and Machine Learning (ML), are changing the ways firms do things — more than three quarters of insurers predict that the underwriting of non-complex risks will be undertaken entirely by AI and almost two thirds of banks expect AI to be used to design new products within the next 10 years.
  • Data, and it’s use, is growing exponentially — we are in a period of unprecedented data creation. Every day we send nearly 300 billion emails, 500 million tweets, share over 500 million photos, and make 5 billion internet searches.

Technology story so far

This dramatic change in the industry fed by these trends of rapid technology development, exponential data creation and the entry, of new large providers into financial services, poses interesting questions for regulators and central banks.

What, for example, is our opinion on technology? Its use can provide significant value to society but it can also be used, inadvertently or otherwise, to do harm. Are there certain technologies we are instinctively wary of?

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Can we remain ‘technology-neutral’ in a world where technology is so embedded in the delivery of financial services and so fundamental a driver of consumer outcomes?

Should we talk solely in terms of ‘outcomes’ while remaining ‘agnostic’, or can we show a preference for certain technologies? Can we remain ‘technology-neutral’ in a world where technology is so embedded in the delivery of financial services and so fundamental a driver of consumer outcomes?

These are questions the FCA, and I suspect most colleagues in the audience are dealing with more and more. And, from my perspective, they have become more prevalent as our approach to innovation and technology has matured and evolved.

I’ll come back to these questions in a moment, but first I think it’s worthwhile describing where we started off at the FCA in encouraging innovation and where I think we are going.

When we began addressing the issue of innovation, we were very much focused on the external environment; how we could engage with the ecosystem and encourage firms to embrace new ways of doing things in the interests of consumers, helping firms with innovative business models to develop by providing bespoke regulatory support, and providing a sandbox where their ideas could be tested.

On the RegTech side of things we held TechSprints to encourage collaboration and new ideas, and we observed and supported proofs of concepts to encourage firms to think about how technology could make them more efficient at complying with regulation.

Such efforts have largely been successful in achieving the original aims we envisaged when we started out on this journey 5 years ago.

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An evaluation report we published recently demonstrated some indicators of this success:

  • Nearly 700 firms have used our innovation services (sandbox, direct support, advice unit), with applications running at nearly one a day. Additionally, over 200 firms have engaged and actively participated in our TechSprints.
  • Groups of firms that have used our Innovate services have come to market and been authorised 40% faster than equivalent financial services firms.
  • Of the 47 firms that have completed sandbox testing, around 80% are operating in the market, with the necessary authorisation, and there are a further 63 in the pipeline.
  • Start-ups and large firms are actively engaged in these innovation activities.
  • Start-ups specifically, in the first cohort of the Sandbox have received over £130m of equity funding.
  • Of the 44 start-ups that tested in the first three Sandbox cohorts, almost half either received additional investment or were acquired during or after their test.

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