Regulators finally in the modern age as FCA doubles down on London’s world-leading FinTech sector

A close look at how a new report by KPMG and efforts by the FCA to modernize itself is set to provide a framework for FinTech regulation in London, the world’s largest development ground across all financial industry sectors

It has long been apparent that the official regulatory authorities which create guidelines and in some cases govern the methods by which financial services can be provided to retail customers are more gray suit and clipboard than software savvy.

Whilst that may well have been an appropriate methodology in the paper-trail 1980s, today’s electronic, borderless access financial markets resembles the interbank world in that it is a technology-led business.

Back in the early 1990s when IBM mainframes and ten year development cycles dominated the trading desks of the Tier 1 banks, algorithmic trading was in its pioneering years, and only the major market makers of London, Chicago and New York had in-house systems development teams totally in some cases up to 200 technicians in R&D, user testing, regression testing, application integration and packaging, connectivity and network architecture, paving the way for the trading floors to look as they do now – silent, automated areas operated by holders Computer Science doctorates compared to the baying barrow boys in the open outcry pits of the 1980s.

Back then, retail financial services in developed nations with a diversified economy were provided by ‘home service’ representatives, who visited the houses of investors to sell them an endowment policy, and effectively with regard to retail and institutional financial business, never the twain should meet.

Today, things are somewhat different, however despite the massively developed retail world in which traders are developing their own algorithms, utilizing bespoke charting software and accessing tier 1 markets from their living room, sometimes with their own front end trading system, regulators are still taking caravan holidays in Dorset and wearing pleblon trousers.

This week, however, Britain’s Financial Conduct Authority (FCA) has begun to take steps toward creating a modern regulatory framework for financial technology firms – or as the recent acronym defines them – FinTech companies.

London is the world’s number one center for FinTech, be it small startups that have generated new application-based systems for trading stocks and electronic wallet systems that power all-in-one investment platforms which can host mortgages, a bank account and a trading account, or whether it is large tier 1 banks and trading desks with enormous infrastructure participated in by global outsourcers such as PriceWaterhouse Coopers, Accenture and Fujitsu-Siemens.

London’s technological domination of the new financial ecosystem is globally renowned, and the FCA has had to pull itself into the new world.

It is actually one of the large professional services companies, albeit one that does not involve itself in technology outsourcing projects for financial entities in the way that Accenture, Capita and Steria do, that produced a report bringing this to light.

Indeed, according to a report by KPMG all regulators, led by the FCA, are becoming increasingly concerned that the scale and pace of fintech development could harm consumers and threatens the financial system.

The report warned that regulators and risk experts were struggling to keep up with the pace of technological change and predicted a fresh wave of regulatory scrutiny in 2019. It raised concerns that an increasing reliance on just a handful of technology firms as well as the use of large data sets was posing risks to the financial system.

The report also warned that “blurring boundaries” between financial services and other sectors – through the emergence of digital wallets – would make regulation even harder. “Around the world we are seeing different approaches to regulating FinTech, but in the UK the direction of travel is consistent with what we have known to date – stringent,” Jon Holt, Head of Financial Services at KPMG stated.

Mr Holt said the development of technology could have been opportunity to reconsider the balance between consumer protection and consumer responsibility, but, in the UK, we wear robust regulation as badge of honor and it is clear that regulators are turning to some familiar approaches when it comes to protecting consumers.”

Regulators have also turned their attentions to the boardroom, setting rules to make sure directors understand the FinTech used by their companies and the associated risks, the report found, and KPMG deputy chair Melanie Richards urged board members to wise up to the risks and called on FinTech firms to prepare for a tougher regulatory environment.

This may appear to be bureaucratic wrangling, however London leads the way, and has done for many years, in terms of the development of institutional technology, ranging from the proprietary systems used in the world’s largest interbank FX dealers, to vast non-bank interdealer brokers such as ICAP’s EBS BrokeTec, trade clearing and processing firms, integration technology providers and Britain’s world renowned proprietary trading platforms that are developed and supported by large, publicly listed companies such as CMC Markets, IG Group and Hargreaves Lansdown.

The level of sophistication within the infrastructure sector, Equinix’s points of presence and low latency connectivity being a pinnacle of efficiency when executing global order flow being an example, also positions London as a world leader, however there is a new element, which consists of ambitious Millennials, developing and shaping the future of FinTech from incubators and newly founded entities which span from Shoreditch to the Square Mile.

These need stimulating, and whilst they benefit from working in the most advanced FinTech city in the world and have a massive talent base on their doorstep, the business environment must be friendly toward them.

London is home to vast electronic trading companies with proprietary technology, as well as the entire institutional FX sector for the global brokerage industry, plus 49% of the world’s interbank order flow. For this vast financial markets powerhouse, most of the technology is developed in house, in London, therefore ancillary service providers are not only in very good company, but have enormous, advanced and well capitalized potential customers literally on their doorstep.

The government’s will to provide even more incentive to companies in London to commit further resources to FinTech development is evident in the government’s R&D tax credit system, in which no corporation tax is payable.

All a company has to do is commit a certain percentage of its activities and resource toward research and development (R&D), and certainly the majority of FX technology vendors are very R&D focused due to the leading edge and fast moving nature of this business, and no, you do not need to be a giant multinational, as the genius of this is that Britain wants to stimulate leadership, innovation and modernity by empowering small to medium enterprises – exactly those which develop the latest solutions which drive the industry forward.

With the demands of the new generation and London’s base of varied talent and a cross spectrum of companies providing high end services to an analytical and perfectionistic domestic audience which is used to quality service, regulators have a duty to catch up as this only strengthen’s London’s position.

 

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