During the past month, I’ve enjoyed a real ding-dong of conversations between Europeans, Americans and Brits about fintech and, to be more specific, regtech. Regtech is a couple of years behind fintech, and is all about how to use technology to make regulations more efficient and effective. The claim is that the UK leads the field in this space, but why is that?
My belief is that it is because the UK government and the London mayor’s office have focused strongly on making London and, more widely, the UK the leading platform for fintech. Bearing in mind that financial services deliver a double-digit gross domestic product and multi-billion-dollar tax contribution to the UK economy, and you can see in part why this is important. But has this made any real difference when more than half of the fintech investments are in Silicon Valley, with Continental Europe dragging its heels by comparison.
Different dilemmas
I guess the real difference is three discussions that took place this month: one with the White House, one with a member of the European Parliament (MEP) and one with the UK's Financial Conduct Authority (FCA).
The White House discussion was about decentralised, rules-based regulation and how that is preferable to centralised, principles-based regulation. Each state can pretty much do its own thing, unless it is embedded in a lengthy law, such as Dodd-Frank. Dodd-Frank started out as an 850-page document but, after five years of discussion and fine-tuning, is now almost 14,000 pages and 15 million words in length. Even with all that, there is 40% still to implement and the legislation is creeping at the seams of insanity when it comes to interpretation and implementation. It is claimed that this is why the US has not seen a single new bank start-up in the past 10 years, except for a few community banks and the new Goldman Sachs digital retail bank.
Compare that to the UK, where almost 40 new banks are going through the regulatory sign-off process, with Atom Bank being the first out of the gate. The FCA launched its new Project Innovate earlier this year with its first deliverable being a regulatory sandbox, announced in April. The sandbox allows start-ups to test their ideas with the regulators before release to the general public, and engages fintech start-ups so that they can get a basic licence to offer under restrictions within just two months of application. That process is being copied in Singapore, Hong Kong, Dubai and other countries, but the US and Europe are more retrospect.
Europe, like the US, prefers rules-based regulations in general, and would limit start-ups from getting licences too fast. Having said that, Europe is also somewhat more innovative with the open sourcing of bank data under Payment Services Directive 2 – PSD2 for short – that forces banks to make their data accessible to trusted third parties via open application program interfaces (APIs). Americans don’t like APIs or, to be more precise, American banks don’t like APIs or data access and are fighting against such openness through Washington lobby groups.
Stronger together?
But the real test of Europe is whether it is stronger together or not. This is the test of the UK Brexit vote which will now be known but, as I write, is an unknown. My MEP friend was saying that the fact a UK MP can stand up as part of Europe and fight against the US interpretation of the Basel rules is testament to the backing that the EU gives us and her. Together we are stronger was her message. It is an interesting message as, in evidence of our divisions, the UK’s rules and innovation structures designed to fast-track firms and create more competition differ widely from those in Germany. As my German regulatory friend commented: you are more flexible in London. My FCA friend replied that we are more pragmatic.
Whatever your views, it is clear that regulation is as much a part of the financial market operations and attractiveness as liquidity and, in order to attract liquidity, regulators are trying hard to create an open, simple and accessible environment for both incumbents and start-ups to operate. London and the UK are at the front of field in that debate. Will the rest of Europe and the US catch-up or will we see the errors of our pragmatic ways?
Chris Skinner is an independent financial commentator and chairman of the London-based Financial Services Club.
