Out-Law Analysis 3 min. read

Financial regulator asks industry: are regulations holding back digital and mobile innovation?

FOCUS: Innovation is at the heart of financial services, with companies creating products that enhance consumers’ lives and lead to more effective competition. Yet sometimes regulation can stand in the way of innovation and make it harder for businesses to improve the services that they offer to their clients.

The UK Financial Conduct Authority (FCA) has launched a consultation (5 pages / 317KB) to find out which regulations – both at a UK and EU level – are acting as barriers to innovation across digital and mobile services. The FCA’s call for input gives the financial services industry the chance to highlight which rules or policies are standing in the way of innovation and also which regulations should be introduced to help make innovation easier.

Three areas in which a lack of regulation or inappropriate regulation are causing obstacles to digital and mobile propositions are digital identities, straight-through processing, and who pays for the use of mobile and digital infrastructure. Finding solutions to this trio of problems would help financial services providers to design more innovative digital and mobile products and services.

From signatures to identities

When the EU E-Signatures Directive came into force in 2002 it failed to create a consistent legal framework for services either within or between EU countries. Since then a lot of hard work has gone into replacing the Directive with a new E-Identification Regulation, which is due to become effective on 1 July 2016. While the Regulation opens the way for member states to form digital identity schemes, it does not impose an obligation to do so on a mandatory basis.

But verifying the identification of a person holding a mobile phone while trying to access a service; making sure their transaction is secure, and ensuring that accurate records of transactions are kept are all essential in making sure that digital financial services run properly. The UK Cabinet Office’s Verify scheme and The Savings and Investments Policy (TSIP) 'digital passport' project being run by the Tax Incentivised Savings Association (TISA), an industry group that is developing a digital passport for use within financial services, are two promising enablers for the UK's digital economy.

Verify aims to authenticate the identification of individuals who want to access government services online, such as checking tax credits, claiming rural payments and viewing driving licence information. ID assurance providers already signed-up to the initiative include Barclays, Digidentity, Experian, GB Group, Morpho, PayPal, the Post Office, Royal Mail and Verizon.

TISA on the other hand is approaching the issue from a sector-perspective and looking to develop a financial services digital passport, a secure store of validated information about a client to overcome the difficulties that both financial institutions and customers face when interacting solely online. A digital passport would allow customers to submit identification documents – such as their passport or utility bills – just once, rather than each and every time that they want to open a bank account or buy an insurance policy. Framing sector-based rules to govern digital passports which harmonise with the EU E-Identification Regulation could lead to further innovation in this field.

Removing the need for paper

Tied-in with the need to make online identification easier is the issue of straight-through processing. Selling products and services on mobile platforms will only become an effective channel if regulations are streamlined so that providers no longer have to supply paper copies of contracts to their customers.

At present, rules in the FCA’s Handbook – which in turn are based on the implementation of the EU Distance Marketing of Consumer Financial Services Directive – mean that consumers have the right to request paper copies of certain documents. Removing this requirement could allow insurers and other financial service providers to reduce the costs involved in selling products and services online or through apps.

The cost of infrastructure

A greater barrier to digital and mobile innovation is how to compensate the owners of digital infrastructure for new entrants' use of it.

Established banks have spent large amounts of money developing payments systems and telecommunications companies have devoted a large proportion of investment to provide the underlying networks. While giving small businesses and new entrants access to such infrastructure can help to stimulate competition, the institutions that have developed such systems still need to be able to reap the benefits of their investments.

Drawing up regulations that allow banks and telecoms companies to realise their investment in infrastructure while still allowing start-ups to access those systems would be a major step in stimulating innovation, bringing new and existing players together to create further products and services that work on the same platform and which can share the same data.

The FCA’s wide-ranging consultation on regulatory barriers to digital and mobile innovation gives firms the opportunity to shape how the rules and policies governing their sector can be changed to make processes easier for businesses. There is an opportunity here to introduce innovative regulations that can lead to innovative products and services for customers.

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