The FCA Reveals Project Innovate has Benefitted Almost 700 Firms
The Financial Conduct Authority have revealed that almost 700 firms have benefitted from support provided by their innovation programme, Project Innovate, since its inception in 2014. The service aims to help firms to design and implement innovative products and services that promote effective competition in the interests of consumers. The project has been well-received all round, with over 1500 firms applying for the regulatory sandbox, and it has been suggested that those firms that are accepted have increased credibility with customers and investors as a result.
The main guiding principle behind the FCA’s project is that innovation is a positive driving force for effective competition – helping it to meet its third operational objective, to promote ‘effective competition in the interests of consumers’. The theory here is that the increased confidence that comes from working with a regulator enables firms, especially those new to the sector, to design and implement new products and services with certainty from concept through to launch into the market. This builds the appetite to innovate which in turn creates more opportunities for consumers to be better served. Established firms must then react to this competition, driving standards up and prices down. Innovation in the financial services sector tends to focus on new products that are better suited to customers’ needs, new solutions to new and old problems, and inclusive products.
The FCA aims to offer sandbox firms assistance with the entire regulatory lifecycle. In practice, most of their interventions are in the form of early steers on the application of regulation, clarity which helps firms to design their business model with the regulatory landscape in mind. Some of the products receiving informal steers include robo-advice and an automated advice tool for consumers approaching retirement. The FCA are able to offer guidance on any aspects that would not meet regulatory standards, enabling the firm to amend the product or enact a work-around to continue development.
The regulator also offers advice on understanding and navigating the authorisation process, but does not focus on whether the business model is viable commercially. The feedback from firms is mostly positive and suggests that the FCA are responsive and collaborative.
Although this is an early stage in the results of the project, the FCA are confident that their original objectives are being met, namely that innovative firms are getting to market quicker, with firms coming through Innovate being authorised on average 40% faster than standard and the FCA are seeing evidence that innovative firms are accessing investment.
Similarly, there is clear evidence that existing firms are responding to the competition and disruption that results from more innovative work entering the market. Whilst a definite causal link cannot be proven, the FCA points out that innovation in general is at least accelerating the developments of incumbent firms, meaning that even new firms with a relatively small customer base are aiding beneficial outcomes for consumers in the wider market.
Only 60% of Sandbox applications come from firms within London, bucking the FinTech trend (reports suggest over 90% of total capital in FinTech goes to London based companies). However, a third of applications are from Retail Banking sectors, with the FCA reporting a low uptake from other sectors, such as Asset Management, despite attempts at engagement. The regulator is looking to expand its offering, meeting the needs of Sandbox firms, in the future.
The FCA’s innovation work doesn’t just revolve around this project, highlighting just how important the regulator considers innovation to be. The FCA hold their own events and produce policy on innovation in financial services markets, and launched the Global Financial Innovation Network (GFIN) in January 2019, which aims to support financial innovation in the interests of consumers around the world, sharing experience, and will create an environment for cross-border testing.
With the regulator’s commitment to supporting innovation continuing from strength to strength, new and established firms in the UK and beyond can be confident that regulation is no longer a barrier to innovation.