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New trends in the financial sector - What regulatory framework for digital retail financial services (data protection, new entrants)?

Digital innovation, competition and consumer protection: the FCA’s approach

By Geale David - Director of Policy, Financial Conduct Authority (FCA)


The global economy is becoming increasingly digitised. Digital solutions can be more convenient for many consumers; they offer efficiency and cost benefits to providers and, as a result, digital technology is becoming integrated in all sectors of the economy.

While the advent of greater innovation is welcomed and should be encouraged, we must not lose sight of the potential consumer protection risks of new technologies. Firms will need to ensure their products are accessible and do not discriminate against the digitally illiterate. Digitalised services should also be transparent, providing suitable disclosure. Indeed, they can offer an opportunity to make disclosure clearer and more effective. Effective disclosure is all the more important where digitalisation is accompanied by disintermediation (e.g. in peer-to-peer transactions) such that the consumer assumes new risks.

At the same time, many of the consumer protection risks that exist for traditional products and services are still apparent within innovative solutions. For firms, mitigating these risks should not be an insurmountable barrier to market. By ensuring the risks are factored into initial product design and development, the industry can help innovative solutions bring maximum consumer benefit, offering the services consumers want.

The EY Fintech Adoption Index surveyed six markets globally and found that on average 15% of digitally active consumers are users of Fintech. The survey suggests that the rate of adoption could double within 12 months. The challenge is whether the regulatory framework can keep pace. The FCA takes a risk-based approach to regulation – targeting our resources where the potential for detriment is highest. However, our competition mandate, which has been a statutory objective since 2013, requires us to address a further dimension. How can we foster innovation that genuinely improves the lives of consumers? Are regulatory barriers discouraging new entrants and distorting markets? The risks of innovation have to be weighed against creating unnecessary barriers to the many opportunities. It is a difficult balance to achieve.

The risks of innovation have to be weighed against creating unnecessary barriers.

We have sought to address this by launching Project Innovate, and within that establishing an Innovation Hub, a unit within the FCA geared entirely towards working with innovative businesses with ideas that could stimulate competition to the benefit of consumers. The Hub has done two main things – it has helped firms gain access to fast, frank feedback on the regulatory implications of their ideas and it has begun to tackle the structural issues that innovators have told us impede their progress towards market. Our work on regulatory barriers to innovation in the development of digital and mobile solutions is an example of the steps we are taking to achieve this.

Innovate is now being expanded and strengthened. Part of this involves providing a ‘safe space’, known as a sandbox, in which innovators can test products, services and business models in a controlled environment, free of regulatory uncertainties but with appropriate consumer safeguards. It is an ambitious idea but one that firms have told us they strongly support.