Dr Louise Beaumont, Head of Public Affairs & Marketing at GLI Finance
As the dog days of summer draw to a close, post-Brexit planning continues apace as the Government starts to map out what ‘Brexit’ actually means for sectors ahead of the formal start of negotiations in 2017. Such clarity will be welcome by regulators as they face the unenviable task of ensuring the process of Brexit goes smoothly given the sheer amount of UK regulation derived from EU law.
This is particularly true of financial services. Andrew Bailey, recently appointed Chief Executive of the Financial Conduct Authority, faces the task of navigating this uncertainty as Brexit planning takes priority. His in-tray will be unenviable as he returns from his summer break.
Nevertheless, despite such pressures it is critical that the FCA does not lose sight on the day job and continues to focus on all issues across the financial services spectrum, such as the importance of the nascent alternative finance sector.
Mr Bailey has taken over an organisation that has demonstrated considerable enthusiasm to date for the potential of FinTech, including alternative finance. Through the introduction of Project Innovate in 2014, the FCA has made clear its commitment to supporting innovation within financial services and with the launch of the ‘Regulatory Sandbox’ earlier this year, has created a controlled environment where firms can test out new products that might otherwise have struggled to move beyond the concept stage. The Sandbox has been a significant step change and the regulator should be commended for having taken such action in order to facilitate innovation.
The FCA has also signalled how important it views the development of RegTech. The concept of using technology to enhance regulation has risen from obscurity in recent times and the regulator has shown a willingness to engage on what benefits it could bring for businesses and the FinTech community as a whole.
Despite such progress, there is now a need for Mr Bailey to build on this momentum and empower the FCA further in order to ensure sectors such as alternative finance are allowed to flourish.
Firstly, there is a need to expand further on the work done by the regulatory Sandbox. At present it relates to early stage evaluation and the same spirit needs to be applied further across implementation as well as authorisation.
Secondly, the FCA needs to embrace the mind-set more that RegTech has the potential to help it do its job better as a regulator, rather than focusing on the benefits it could bring to businesses. By leveraging technology, rather than relying solely on a people-based model, the FCA could be better placed to regulate emerging sectors more efficiently and accurately. FinTech businesses are tech enabled and the FCA must adapt or risking being left behind, thereby hindering the growth of such businesses.
Alternative finance has the potential to transform the landscape for SMEs in the UK who struggle to gain access to finance. A report produced last year by GLI Finance in conjunction with the University of Cambridge highlighted that increased awareness of alternative finance could add £20bn to the UK economy by 2020. However, such awareness will only benefit the economy if the sector is underpinned by effective regulation that allows the sector to operate efficiently. Such progress is all the more imperative in a post-Brexit landscape that could witness further reductions in lending to SMEs from traditional lenders.
In his first few weeks in the job, Mr Bailey noted his concern on the risks surrounding peer-to-peer lending (one segment of alternative finance). Like all parts of financial services, alternative finance carries risk and his caution should be welcomed as a reminder that there is a need to continue to strengthen the regulatory framework that underpins the sector.More effective regulation will also make the sector more attractive to institutional investors, enhancing further how credible the sector is perceived.
Such strengthening will only happen by greater collaboration that builds on the momentum generated since the launch of Project Innovate. Despite the challenges brought about by Brexit that lie ahead for the FCA, it must strive towards more effective regulation that helps the alternative finance sector succeed. Ensuring it remains a priority and getting it right will not only mean alternative finance fulfils its potential but that businesses, consumers and investors benefit as a whole.