Regulatory support for the growth of fintech in London has certainly been evident in recent years.
Democratisation of financial services, greater consumer choice, lower costs and greater resilience of financial infrastructure are just some of the reasons why the Bank of England (BoE) is encouraging financial technology (fintech) development in the UK.
That’s according to Governor Mark Carney, who addressed an audience of fintech entrepreneurs, regulators, politicians and banks at the UK Treasury’s inaugural International Fintech Conference in London.
Regulatory support for the growth of fintech in London has certainly been evident in recent years. The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have changed their authorisation processes to support new business models, and the BoE also established a fintech accelerator last year.
To date, it has worked with a number of firms on proofs of concepts relating to cyber security, using artificial intelligence (AI) for regulatory data, and distributed ledger technology.
But what is interesting in this speech is the BoE’s focus on ensuring “the right hard and soft infrastructure are in place” – a central plank of the Governor’s vision of maintaining London’s role as the centre of fintech excellence.
“Over the centuries, we have learned that markets and innovation thrive with the right hard and soft infrastructure”, he said. “Hard infrastructure ranging from transport links to broadband and payments architecture; and soft infrastructure from the rule of law to market practices, codes of conduct, and regulatory frameworks.”
So how does this relate to fintech, one may wonder? Governor Carney continued: “With respect to soft infrastructure, the Bank is assessing how fintech could change risks and opportunities along the financial services value chain. We are then using our existing frameworks to respond where necessary.”
On developing the right “hard infrastructure”, Carney pointed to how the BoE is working to develop the financial system’s hard infrastructure to allow innovation to thrive while keeping the system safe. In particular, he highlighted how it is widening access to some of its systems to include Payment Service Providers (PSPs) in order to boost both competition and system resilience.
“The UK has led the world in innovation in the wider payments ecosystem. And we are committed to keeping pace with customer demands for payments that are seamless, reliable, cheap, and ubiquitous. Our challenge is how to satisfy these expectations while maintaining a resilient payment systems infrastructure.
“That’s important because the Bank operates the UK’s high-value payment system ‘RTGS’ (Real-Time Gross Settlement) which each day processes £1/2 trillion of payments on behalf of everyone from homeowners to global banks. Understandably, we have an extremely low tolerance for any threat to the integrity of the system’s “plumbing”.
“Currently, only 52 institutions have settlement accounts in RTGS. Indirect users of the system typically access settlement via one of four agent banks. These indirect users include 1,000 non-bank PSPs at the front-end of the financial services value chain. As they grow, some PSPs want to reduce their reliance on the systems, service levels, risk appetite and frankly goodwill of the very banks with whom they are competing.”
Interestingly, the BoE has decided to widen access to RTGS to include non-bank PSPs in order to help them compete on a level playing field with banks, and is working with the FCA and HM Treasury to make this a reality.
This ties in with Carney’s final example of the “soft and hard infrastructure” – coordinating advances in hard and soft infrastructure ensure the Bank can help the industry realise the true promise of fintech.
“New technologies could transform wholesale payments, clearing and settlement. In particular, distributed ledger technology could yield significant gains in the accuracy, efficiency and security of such processes, saving tens of billions of pounds of bank capital and significantly improving the resilience of the system.”
A full copy of Mark Carney’s speech is available here.