Financial Conduct Authority: Breaking Down the Barriers to Financial Innovation

What is standing in the way of innovation in the UK financial services industry? The regulator wants to find out.

The digital revolution underway in the financial sphere has not escaped the attention of the City’s watchdog, which wants to know how it can help firms that want to innovate but are being stifled by regulation.

This summer, the Financial Conduct Authority (FCA) asked the industry for input on perceived regulatory barriers to innovation in digital and mobile solutions. The deadline for responses was 7 September, and we can expect to hear the FCA’s findings at some point this autumn.

So what has the industry told the FCA? Here’s a roundup of some of the main issues raised by a selection of trade bodies, ahead of the regulator’s report.

Wealth managers

The Wealth Management Association complained that EU regulation has sometimes been imposed on UK firms without enough consultation (such as the rules about cost disclosure in MiFID II). When this happens, firms have to spend their IT budgets on making sure they comply with the rules, curtailing their research and development spend.

It also said the requirement for portfolio managers to send quarterly valuation statements to clients has hindered digital progress. “The rule, rather than promoting innovation, has the unwanted consequence of bringing some firms to abandon online valuation development projects altogether in favour of quarterly paper statements.”

Card payment providers

The UK Cards Association flagged the issue of regulatory ‘gaps’ in places where digital technology converges – for example, in the different levels of redress available when a customer has made a mobile payment but has not received goods or services. For example, it noted that payment services Apple Pay, Paym and Direct Operator Billing (such as Boku) are each governed by different rules.

It complained there are so many regulators operating in different sectors that ‘silos’ have formed, presenting a challenge to any potential innovators.

UK Cards suggested the European Commission has made more progress towards removing regulatory barriers with its Digital Single Market strategy, which aims to “tear down regulatory walls”, giving more consumers access to digital technologies.

It said London has been able to emerge as a globally recognised tech hub largely because of the pro-business agenda of the coalition government, which asked entrepreneurs what they wanted and then responded with a package of incentives such as the Enterprise Investment Scheme, and Research & Development Tax Credits. This should be a template to follow in fostering fintech development in future, it said.

Financial advisers

The Association of Professional Advisers (APFA) flagged “the sheer volume of requirements at both the UK and EU levels” as a top issue for adviser firms which is preventing innovation.

But, crucially, it also said the issue of liability remains a major worry. The APFA said surveys of its members have shown advisers are nervous about pursuing new technological solutions unless they have full liability coverage in the eyes of both the FCA and the FOS. Until this is assured, firms will stick to the usual ‘old-style’ service and will be slower to pursue innovations because of the risks involved, the association said.

Fund groups

The Investment Association (IA) takes a more dramatic approach, essentially urging the FCA to rip up the Handbook and start again. It suggested the financial sector has changed so much that the old rules are no longer fit for purpose. “The rules and guidance are approaching the point where the context in which they were written makes them increasingly out of sync with the reality of how firms would like to do business in the digital age.”

The body also called for a rethink of the concept of investment advice, arguing the complexity of the issue acts as a disincentive for firms “which might otherwise develop digital services to help consumers make smarter decisions about their wealth or income.”


The Financial Services Consumer Panel has argued that commercial viability is more of an issue for incumbents than regulatory barriers. Nevertheless, it has urged the FCA to look more closely at certain emerging models, such as roboadvice, and the consumer protection risks they might entail, perhaps grading them according to a ‘kitemark’ scheme.

It also wants to see innovation improve access to financial services for underserved consumers – for example, prepaid contactless cards for the digitally excluded.
However, one thing the Consumer Panel is quite clear on is that regulation need not stand in the way of innovation. It pointed to the tobacco industry, which has had to innovate rapidly to stay afloat in an environment of severe restrictions. Maybe the same will be true for the financial sector, the Panel says, because, “necessity is the mother of invention”.

White Paper: MiFID II for Asset Managers: Threat or Opportunity?

Financial Conduct Authority: Breaking Down the Barriers to Financial Innovation 1The European Union (EU) MiFID II regulations, which come into effect in January 2018, will have a huge impact on the asset management industry. But many managers do not yet have the technological solutions to comply and thrive in the new regime and software providers expect a capacity crunch as investment houses rush to prepare. We look at some of the issues and opportunities.