At some point over the next few months the FCA is expected to launch a consultation on potential updates to the regime governing safeguarding requirements for payments and e-money firms. Whilst this is in itself perhaps not remarkable, if and when it happens it could mark the beginning of a paradigm shift in the way that material areas of fintech are regulated in the UK.

The Edinburgh Reforms announced in December last year included a policy paper on “Building a smarter financial services framework for the UK” which outlined the intention, in a post-Brexit world, to transfer more responsibility for regulatory requirements from Parliament to regulators in areas of retained ('onshored') EU law. This regulatory model already applies to most other financial services areas under Financial Services and Markets Act 2000 (FSMA). Essentially it means that the fine detail of nearly all financial regulation in the UK will ultimately be devolved to regulators making rules, instead of a number of areas being governed by parliamentary legislation. These new powers are set to be given to the FCA under the Financial Services and Markets Bill, which is expected to gain royal assent before the parliamentary summer recess. The safeguarding consultation is expected to be one of the first consultations launched under them. It will be the first time that the FCA will have primary responsibility for reviewing, amending and implementing detailed rules on key aspects of the regulation of payments and e-money that have hitherto fallen under the remit of parliament (and by extension in this case, the European Parliament).

Whilst at first blush this may appear to be little more than an administrational technicality, the ability for a sector-focused regulator – rather than parliament - to alter legislation in areas like payments has the potential to revolutionise the efficacy of the regulation of innovative fintech products. The principal reason for this is that innovators naturally move far faster than legislators, and invent things that legislators could never have been expected to consider. Under the current, non-FSMA model of regulation being passed down by legislation, it can take years for legislation even to be drafted and brought before a domestic parliament, let alone a European one. This means that by the time it comes into force it is often not fully relevant to the market as that market has evolved, and in some aspects can even border on being obsolete. This regulatory lag presents a significant problem for innovators operating in or around the regulated space, because regulation is always catching up with industry and is perpetually not fully suited to the range of new technologies and new business models that it is intended to regulate. That in turn means that innovators can be left hanging, unsure of their regulatory position for long periods of time, which in turn has the effect of dampening growth and investment. It also means that in some cases regulators are bound to regulate parts of an ecosystem that are not necessarily where the risk lies in newer business models, and vice versa.

These are not theoretical problems, especially for early stage businesses that need to move quickly; they are real-world issues that stifle growth. It is therefore far better for a body of regulation to be able to adapt more quickly to respond to innovation, through a regulator-led model that can adapt rules quickly and in line with the market as it evolves. Doing so will reduce unnecessary cost and uncertainty for growing businesses, will encourage innovation and the UK’s competitiveness, and will increase the effectiveness of consumer protection.

Achieving this is of course not without its challenges. For the benefits of this new flexibility to be realised, the regulators making the rules need to be fully informed about developments in tech and business models as they occur, what issues market participants are experiencing with current rule sets, and what is coming down the track. That knowledge requires regular and detailed dialogue with industry, sufficient relevant expertise within the regulators’ ranks, and alignment between the regulators as to priorities and enforcement. Industry associations have a large part to play in this dialogue, and probably more so in the innovation space (where each participant has a smaller voice) than in other areas; equally, fintechs themselves have a role to play in engaging with industry bodies and with regulators on the issues they are facing and the business models they operate. However, the stage is at least now set for these changes to occur, providing hope that regulation can be adapted to innovation far quicker than is possible in other leading finance centres, making the UK more attractive from an inward investment perspective - which is in turn a hugely positive development for the growth of early-stage fintech businesses across the UK.

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Chris Hill, Partner and Fintech lead, Deloitte Legal

Stewart Cook, Associate Director, Deloitte Legal

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