Thu. Nov 14th, 2019

Planet Compliance

Innovation & Regulation in Finance

How to establish an innovation hub and master the challenges that follow

7 min read

London is one, if not the leading innovation hubs of the world for FinTech and RegTech. In most statistics it takes the top spot for number of unicorns and companies active in these sectors, investments in terms of financing coming from its own shores and foreign direct investment, and people employed by startups.

A number of the world’s biggest tech companies have also chosen London in recent years and then there is, of course, and combined with its history in financial services and related professional services make it a place difficult to beat.

Many other locations have tried to challenge its position and in the dawn of Brexit things might change. Yet, it still serves as an excellent example for other locations that seek to establish an innovation hub or improve their current endeavors.

Naturally, simply copying from London’s playbook is not going to work for everyone because there are some aspects that are very specific to London and cannot be replicated or at least not within a short time frame and/or only at an enormous that might be difficult to justify.

However, using 3 key factors, we explain on the example of London how the British capital managed to claim the top spot and if/how each of them can be emulated:

A leading financial centre

London has a long history as a financial centre, but only at the end of the 20th century it broke away from other competing cities to establish itself as the leading European financial centre. Legislation like the “Big Bang” reforms passed by Margaret Thatcher’s government in 1986 and its role in the development of new financial products such as the Eurodollar and Eurobonds in the 1960s, international asset management and international equities trading in the 1980s, and derivatives in the 1990swere key contributors to its rise. Against the background of a leading financial hub, innovation can grow and find the demand both in terms of clients and investors that are fundamental for its success.

 

Talent, Availability, and Demand

Obviously, it requires entrepreneurial talent to seize such a chance and with its central location, London attracts bright minds from all over the UK, Europe and elsewhere. In fact, the reputation of its universities also means that many people already get attracted at school level, adapt to its system and eventually seek to continue their career path in Britain with the English metropolis offering the most opportunities.

At the same time, a young and open-minded society is ready to embrace technological change and make use of it. This creates vital demand for new products and solutions, start-ups develop. Larger institutions are supportive of such trends, too, creating in turn much needed funding and infrastructure.

Support from authorities

The UK’s authorities are also very supportive when it comes to FinTech and RegTech innovation. For instance, FinTech is generally perceived as a priority for economic growth, which is a central element in regulatory policy. Take the FCA’s mission to promote innovation in the interests of consumers, which is in stark contrast to other jurisdictions, where national regulators have different objectives.

In the spirit of these objectives, the FCA early got engaged through initiatives like Project Innovate and among the first to allows businesses to test innovative propositions in the market, with real consumers through the use of regulatory sandboxes. This isn’t an isolated incident though as other institutions work with a similar mindset. The UK’s central bank, the Bank of England’s, together with the FCA has created an industry-led Technology Working Group to “bring together different financial market stakeholders to catalyse collective action and reform in the use of technology in the post-trade system”. The FCA also seeks active collaboration with regulators in other jurisdictions and was the spiritus rector of the Global Financial Innovation Network (GFIN), a network of 38 organisations committed to supporting financial innovation in the interests of consumers.

It is this top-down approach that encourages builds trust in the tech community and opens doors.

 

Hazy times ahead?

Replicate Success

Is it possible though to replicate London’s success or is it just a lucky case where a number of factors come together in one place? Examining the three main factors one by one, we should get some answers:

To begin with, the aspect of being a financial centre certainly can be achieved though in a different form than as it is the case for London. For example, the British metropolis benefits from its geographical location sitting in a time zone that makes it possible to cover global markets around the clock. It also sits at the door of several other important European locations as an entry place, though this aspect is currently under threat for well-known reasons. It isn’t solely the presence of a large number of financial institutions that is key; the supporting network of professional service providers like accountancy firms and law firms is equally essential for its success. Building a structure of such a scale takes time and in the case of London it is eventually the result of something that has grown over centuries.

A society that embraces technological change on the other hand might be something easier to achieve. In fact, it can be argued that Berlin in particular has overtaken London at least in some areas as a more attractive place to build. New York equally has traditionally been a location that attracts talent as it caters for all the other interests of a younger crowd. And large institutions are always ready to back this up wherever they see the best chances.

In terms of a regulatory framework in favour of tech innovation other jurisdictions already take great efforts to woo start-ups and Singapore springs to mind as the distinct example.

The Monetary Authority of Singapore (MAS) is Singapore’s central bank and integrated financial regulator, advertising Singapore by offering financial institutions a pro-business and cost-competitive environment, excellent infrastructure, and a highly skilled and cosmopolitan labour force.Its dedicated Smart Nation initiative is all about innovation, inclusion and inspiration, supporting FinTech firms with grants for innovation, regulatory sandboxes and a number of other measures tailored to the sector.

At this point it might also be indicated to highlight that a favorable regulatory framework is not a matter of course set in stone: Considering financial regulation that specifically designed to increase market competition like open banking through the PSD2 could well be a thing of the past for the UK in case of Brexit and limited access to the EU’s single market.

Therefore, while it may be difficult for other locations to replicate London’s success story one-to-one, it might actually be the UK’s own doing that could kick it off the throne.

 

 

 

 

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