What banks need to do to encourage regulators to focus on innovation and competition, not just consumer protection

Out-Law News | 28 Nov 2014 | 9:50 am | 3 min. read

John Salmon’s Financial Services blog

Financial services sector head John Salmon and the Pinsent Masons financial services sector team bring you insight and analysis on what really matters in the world of financial services.

One consequence of the financial crisis of 2008 has been an increase in the amount of regulation that financial services businesses face – 40 new laws at EU level since 2005, according to the European Data Protection Supervisor earlier this week. The number of regulatory bodies is increasing, as is the amount of activity that is regulated.

This state of regulatory flux means that regulators are constantly facing decisions about how they co-ordinate their actions and deal with fundamental questions about what regulation is for, particularly in relation to digital issues. For banks and others in the financial services sector, these circumstances present an opportunity to influence thinking and help regulators see that their function is not only to protect consumers, but also to enable innovation and competition.

When you look at what regulators say they are trying to achieve, what often stands out is their interest in demonstrating that they are taking action to protect consumers. But when you think about what regulators should be trying to achieve, just as important as consumer protection is the need to take action to enable innovation and encourage competition in markets.

Banks should be thinking about how they can best influence how regulators strike the balance between these competing interests.

For example, innovation can be discouraged if a regulator takes an extreme or absolute position on the need to protect consumers in relation to matters such as privacy and authenticating signatures or identities. Regulators might take a hard line on these issues and end up offering consumers more protection than they get offline which is not in itself a bad thing. But when greater protection comes at a cost consumers do not expect or want there is failure in the regulatory framework. Banks can help regulators see that taking an unbalanced position can be harmful not just to the sector but also consumers in slowing access to digital products and services that focus on their needs.

Banks should seek out opportunities to help regulators to achieve a better balance by engaging in both formal and informal collaboration and treating engagement with the regulators as a priority.

Another important issue that regulators often struggle to address is the need to keep pace with changes in technology. The FCA has conducted thematic reviews into specific issues such as social media, mobile payments and online advice and set up an innovation hub to discuss issues with the financial services sector. We also see this with a number of other regulators looking to address standardisation issues particularly around data security and payments systems. 

These developments indicate that regulators want to address these issues, but do not have the resources to do so on their own. It is almost always the case that banks and financial services providers are better informed and able to understand innovative technologies and the impact they will have on markets.

We are hopeful that the FCA's innovation hub will be a great start to a more informal, productive consultation regime. Banks should make full use of this and any other collaboration opportunities they can to help regulators understand the benefits for consumers of innovation and improved competition in digital financial markets.

The FCA says it is moving away from a reactive approach to regulation to a pre-emptive and judgment-based approach. It is engaging in a number of thematic reviews, consultations and roundtables on banking issues. It has also established Project Innovate, which is not just there for the benefit of authorising start-ups. It sees this as a vehicle for more fluid engagement between the regulator and industry on innovation, demonstrating that it sees a role for itself in encouraging innovation and development of new kinds of services.

As EU level reforms may make it mandatory for banks to report data security and other incidents to a number of different regulators, banks must plan carefully for the changes to come if they are to convince regulators to focus on innovation and not disproportionately on consumer protection.

Banks should be offering their resources to the regulator, such as data and expertise, to help the regulator do a better job and help them understand the logic behind a shift in balance away from enforcing conduct risk rules in isolation, and towards encouraging innovation and competition.