The
bulk of financial regulation that we see today is born out of Industrial Age
crises – one could even argue the recent credit crisis and ensuing regulation
was an Industrial Age event. But today’s Information Age necessitates a
different regulatory model, one based on a more progressive collaboration
between regulators and the new, digitally native ideas and startups. And the
best way to achieve that is to create a regulatory sandbox in the US, where
startups and regulators have a dedicated forum for discussing and understanding
the impact new technologies. This will have not only provide much-needed
transparency for new entrants, but also importantly help regulatory agencies
plan for the future state of finance.
A lot of
inspiration for this was drawn from the Digital Finance Roundtable event I
attended in December 2014 in Washington, D.C. The event was designed to cover
the impact of regulation on financial services technology, and featured an
impressive cross-section of financial services company founders, investors,
regulators, incumbent firms and academics. The regulatory advantage for large
firms (banks in particular) was a noticeable theme: on a range of issues from
peer-to-peer lending to anti-money laundering (AML) rules, incumbent firms
referred to guidance they had received via their in-house installed regulators
or via any number of touch points they had within the respective agencies. New
entrants on the other hand (and not just-launched-yesterday startups; well-funded,
relatively mature financial technology companies) repeatedly cited little or
conflicting guidance and a general lack of engagement from regulators.
In
other parts of the world, we can see great examples of financial regulatory
agencies creating intitiaves and groups to embrace new financial services
models and innovations. In the United Kingdom, the Financial Conduct Authority
(FCA) announced an Innovation Hub in 2014 to not only embrace change and
evolution in financial services but also to provide a single point of contact
for startups’ access to regulators. In 2015, the Monetary Authority of
Singapore (MAS) appointed a Chief FinTech Officer to head its dedicated FinTech
& Innovation Group.
Don’t
get me wrong: regulatory bodies face a challenging task of getting the balance
right. It is not reasonable to think government or regulatory agencies will be
bleeding edge and embrace of all new models before they mature, nor should
they. But regulation is not intended to protect incumbents’ business models.
Nor should size and complexity of an institution be the greatest indicator of
regulatory clarity and access. Today, this is a substantial moat for incumbent
firms. How can an even-well funded startup afford a 50 or 100+ person
compliance team to oversee its activities? Should it need to in order to
compete? A lean, dedicated, cross-regulatory clearinghouse could give financial
services startups the same level of access and guidance to regulators that the
large banks and financial institutions enjoy, while also importantly better
preparing regulators for the new business models that will continue to
proliferate.
This
‘startup approach’ to regulation would enable the industry-at-large to pilot a
model which is adapted to the digitally native world we increasingly live in,
and completely juxtapose the ‘one-size-fits-all’ approach of the Industrial
Age. The startup approach will enable an environment where regulatory
frameworks can be tested in the real world, thereby creating a practical system
that works more efficiently. Of course, there would be the parameters and
limitations around numbers of customers, volume and risk before graduating the
rules to the mainstream regulatory canon or – scrapping them. The key to
regulating finance for the Information Age is creating a system that is
innovative and dynamic.
I may
be overly optimistic and talking our book, but I see financial inclusion,
market integrity, unprecedented transparency and real consumer empowerment to
be very possible by-products of the reinvention of financial services in the
digital age. And whether these come by way of ideas and new companies from UK,
Germany, Australia or any other place, it doesn’t matter. But given the US's
legacy of technological innovation and ability to create and embrace change, it
would seem like a missed opportunity to not create dedicated regulatory sandbox
for the proliferation of new ideas and companies. Maybe a miniscule portion of
the $150 billion+ in bank settlements to date could provide the seed capital?
Tom Ryan,
Partner at Anthemis Group
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