About Innovate Finance
Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.
The UK FinTech sector covers businesses from seed-stage start-ups to global financial institutions that embrace digital solutions, playing a critical role in technological change across the financial services industry. FinTech has grown strongly since the Global Financial Crisis of 2007/8, which led to mistrust in traditional banks and coincided with an explosion in the use of smartphones, widespread adoption of the use of apps, the advent of blockchain technology, and significant investment in FinTech start-ups.
FinTech is synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally improved the ways in which consumers and businesses, especially small and medium-sized enterprises (SMEs), access financial services.
Introduction and key points
The financial services sector plays a significant role in driving economic growth and employment in the UK, both through growth within the sector and through supporting other sectors and markets in the real economy.
The growing presence of FinTechs in the financial services industry has brought with it positive disruption, promoting innovation in the sector and driving greater competitiveness to the benefit of UK consumers and businesses. Through their willingness to experiment and collaborate alongside novel uses of data and their tech-first approach, FinTechs have demonstrated the importance of competition and innovation in ensuring not only the financial services sector but UK PLC remains dynamic and can deliver faster, more easily accessible services, often at a lower cost to the end user.
Innovate Finance welcomes the opportunity to input into HM Treasury’s Call for Proposals on measuring success in financial services regulation. We agree that clear and regular public metrics to measure performance against are an important part of the transparency that is crucial for effective scrutiny and accountability.
We have set out our wider context and desirable outcomes in more detail in Q2, followed by the key metrics the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) should publish in relation to their new secondary growth and competitiveness objectives. We have tabulated our suggested metrics to set out what we believe are the necessary criteria to be met by the regulatory regime for the UK to maintain its lead as a global hub for innovation; these are
- Fit for purpose: updating existing rules;
- Fit for the future: enabling innovation; and
- Innovative, agile regulators.
We would be pleased to discuss our response in more detail with HM Treasury and / or facilitate discussions with our members and the wider FinTech ecosystem.
Consultation paper questions and responses
Question 1: Do you agree with the government’s approach to the exercise of the power of direction in Clause 37 of the FSM Bill?
Innovate Finance is supportive of the government’s approach to the exercise of the power of direction as set out in Clause 37 in the FSM Bill. We find the safeguards on the power of direction sufficient to ensure the regulator remains operationally independent but subject to appropriate checks and balances that allow for accountability for their new secondary growth and competitiveness objectives.
When considering if it is necessary to exercise the power, HM Treasury has set out its intention to engage with industry, consumers and Parliament as appropriate. We welcome more details on the type and approach of these engagements and what steps HM Treasury plans to take to effectively involve start-up, scale-up and high growth FinTechs in these engagements.
Our members have shared that slow, formal consultations are not their preferred method of engagement with the government or the regulators and instead, a well-defined alternative that is accessible for small and scaling firms will be necessary to ensure fair access for small and scaling firms. HM Treasury’s intention to engage with industry must not collapse into informal, ad hoc connections with executive management at large financial institutions to be taken as a proxy for the industry’s view.
Meaningful engagement with the start-up, scale-up and high growth firms must be part of HM Treasury’s roadmap for engagement, especially given their relevance and key role as disruptors in their markets that will ultimately determine how successful the regulators will be in delivering on their international competitiveness and growth objectives.
Question 2: What are the key metrics that the FCA and the PRA should publish in relation to their new secondary growth and competitiveness objectives?
Context and issues
Capability and capacity:
The application of the same rules for start-up and scale-up FinTechs as traditional financial institutions has a disproportionate impact due to the differences in resources, in-depth knowledge and expertise when compared to incumbents. This resource gap affects a start-up’s ability to anticipate, shape, navigate and fully understand regulatory requirements that are often designed for complex, large financial services providers.
Imposing identical rules therefore fails to account for the unique challenges faced by start-ups and scale-ups, hindering their growth potential and innovation. A more tailored and proportionate regulatory framework is needed to ensure that small and scaling firms can thrive and contribute to the overall competitiveness and innovation of the financial services sector.
Example: The current Minimum Requirement for Own Funds and Eligible Liabilities (MREL) regime poses a significant challenge for growing challenger banks, as it treats them similarly to systemic banks once they surpass a relatively low threshold in terms of transactional accounts or assets. The recent consultations by the PRA have acknowledged the existence of a "complexity problem," where the same set of requirements imposes a disproportionately larger compliance burden on emerging challengers compared to established incumbents. This disparity in regulatory treatment raises concerns about the fairness and effectiveness of regulations in supporting a level playing field for competition.
Scale-ups, in particular, tend to face all the regulatory requirements of large, long-established firms but might lack the established channels and contacts within regulatory bodies (e.g. compliance teams and processes) in comparison to large institutions (as illustrated in Figure 1).
Start-up and scale-up FinTechs can also lack awareness of the help and support available to them such as the Direct Support service at the FCA and external advisers. Whilst the new FCA Early and High Growth Oversight programme provides more dedicated support for newly authorised firms, it does not extend the ‘dedicated account manager’ approach to more established FinTechs.
Existing regulation
FinTechs can struggle to adopt and process existing regulatory requirements and find it hard to keep up with compliance requirements during periods of rapid growth which can outpace their ability to scale their compliance teams and infrastructure, resulting in bottlenecks in a FinTech’s go-to-market strategy for innovative products and services.
The lack of clear thresholds and regulatory principles when applying ‘appropriate’ and proportionate controls means there is often a lack of obvious milestones or thresholds as firms grow. As a result, meeting the necessary requirements while maintaining agility can be a significant challenge for start-up, scale-up and high growth FinTechs.
Multiple regulators
As well as the FCA and PRA, FinTechs can be faced with the Bank of England (BoE), and even the Competition and Markets Authority (CMA) requirements and regimes, as well as the Payment Systems Regulator (PSR), Information Commissioner’s Office (ICO), the Financial Reporting Council (FRC) and the Advertising Standards Authority (ASA), as well as other quasi-regulatory bodies like the Financial Ombudsman Service (FOS).
Dealing with multiple regulators increases the compliance burden for FinTechs which can be disproportionate relative to incumbents. Regulators may also take different approaches to interpreting principles or enforcing some rules or principles which introduce uncertainty into FinTechs’ compliance operations exacerbating the issue of compliance burdens and the associated costs of doing business or securing funding and investment.
Pace of change and technology
The rapid evolution in technology in the market and the multifaceted nature of novel products and services means it is difficult for ‘vertical’ FCA teams to keep up with change. Capacity and capability to think about FinTech innovation within established sectors and to process new approvals (e.g. recent cryptocurrency AML approvals, where some FinTechs have had six different case officers) can mean that the UK regime is less responsive and/or ill-designed, especially for start-up and scale-ups.
Product or service offerings where our members are facing these hurdles include Artificial Intelligence, Open Finance, cryptoassets, Distributed Ledger Technology, uses of big data and RegTech. Each of these areas represents a convergence of services and technologies which themselves require novel and proportionate regulatory approaches.
New regulation and consultations
New regulations in ‘verticals’ can be ill-suited to FinTechs and are frequently designed, in remit and enforcement, for established players (culturally and in terms of business models). Our members have shared their perceptions of regulators who can adopt a knee-jerk response when faced with new offerings.
Consultations, as an example, can be an effective engagement tool for collecting industry views on proposals for new regulation but our members have shared they can also tend to reinforce established ways of thinking and, in their proposals and questioning, favour incumbent business models.
Our start-up and scale-up FinTech members have frequently flagged up the difficulty in responding to consultations published by the regulators that often afford them a short time period to respond in a meaningful way.
Regulatory consultations very often coincide with an extremely high volume of other regulatory consultation and discussion papers that are running concurrently. Consultation periods can also disregard public, cultural or religious holidays, problematic from a Diversity, Equity and Inclusion standpoint with colleagues taking leave to observe the holidays.
Many of our start-up and scale-up members’ public policy and regulatory affairs teams are a ‘one-person band’ with limited capacity. So, FinTechs can lack the resource to participate meaningfully in these consultation processes creating a risk that the voice of the FinTech community is not represented in these important discussions.
Limited toolbox
FCA regulation and rules tend to be ‘all or nothing’ - based on having ‘appropriate’ processes, systems and governance. Start-ups and scale-ups in the FinTech sector can face the same regulatory requirements as larger incumbents, irrespective of their size or customer base. This lack of proportionate regulations can pose challenges for start-ups and scale-ups, as they may need to allocate significant resources to meet the same compliance standards as larger institutions, without the same economies of scale.
When issues are spotted, the response tends to be a formal warning and written ultimatum for remedying it. There is limited opportunity for discussion and dialogue between the regulator and the firm when issues arise. Our members have shared that this can feel like a “you've failed” culture rather than one of continuous learning and development.
Investment landscape
Investors will closely monitor the regulatory landscape in which their portfolio companies operate to seek assurance that rules and regulations deliver predictable change and stability within their intended markets. The success of the regulators’ new secondary growth and competitiveness objectives will be determined by how well investors are convinced that the UK is the best place to move and grow their capital.
Example: Analysis produced by Innovate Finance for the Treasury Committee shows that over recent years the UK has been the leading destination after the USA for investment in distributed ledger technology (DLT) and cryptoasset-based businesses. However, other countries are now catching up and, at the time of publishing, Singapore had overtaken and pushed the UK into third position. This can, in part, be attributed to Singapore’s forward-looking regime, particularly in stablecoin regulation. The EU also has recently passed its new rules on markets in cryptoassets (MiCA) which will go a long way towards providing assurance to investors who will be considering whether to choose to invest in the UK or abroad.
Desirable outcomes
International competitiveness
The UK should be the best place in the world to start and scale a FinTech – and it should be a global hub for FinTech innovation, driving talent, capital and international business into the UK economy. This will in large part be determined by a dynamic and proportionate regulatory environment that has the potential to position the UK as the global epicentre for FinTech.
Evidence-based decision-making and regulatory effectiveness
The FCA and PRA must place a strong emphasis on conducting thorough, early-stage evaluations of their policies by employing robust methodologies, including Cost-Benefit and Proportionality Analysis to assess the potential impacts of regulatory interventions on small and scaling firms and competition in the intended market. This analytical approach ensures that policy decisions are grounded in data, evidence, and a comprehensive understanding of the potential costs, benefits, and proportionality considerations.
Consumer protection and proportionality
The UK should foster a trusted and consumer-centric market, striking a balance between proportionate regulations that mitigate risks, while empowering consumers with transparency, choice, and the responsibility of 'caveat emptor' - ensuring high levels of confidence and protection for both consumers and investors.
The starting point for new proposals to the rulebook needs to be an agreed vision of the future state and outcomes of the market in question, one which treats products and services as utilities that support societal and economic outcomes; that should be open to innovation and support the UK’s primacy in FinTech; that should provide fair competition and access; and that supports good consumer outcomes, financial stability and financial inclusion.
Example: If the desired outcome is to protect consumers from harm and reduce unsecured consumer credit, regulators should set thresholds for defaults, which could be determined from established sources, such as the Bank of England’s credit statistics. For example, 1.3% of all consumer credit was defaulted on in 2021, so this metric could serve as an appropriate benchmark for defaults in 2023.
We do of course already have one set of outcome-based rules for FCA-regulated firms - the Consumer Duty. However, the introduction of the Consumer Duty had not led to other more prescriptive or tick box regulations being swept away; rather the Consumer Duty has been imposed on top of - and in some cases in conflict with - older prescriptive regulations that do not necessarily deliver good consumer outcomes.
The Consumer Credit Act 1974 (CCA) is a case in point, where HM Treasury have themselves stated that the CCA “is highly prescriptive and increasingly cumbersome and inflexible – confusing consumers and adding unnecessary costs to businesses when implementing such requirements.” Research by Fairer Finance has shown that consumers find pre-contractual and contractual information inaccessible and often accept whatever they are offered without much thought. This has also shown that the current regime does not work well for consumers with legally-recognised, protected characteristics, such as dyslexia or low vision.
We would like to see much of the FCA’s consumer rules book reviewed in the light of the Consumer Duty to assess what regulations can be swept away in favour of the new outcomes-based requirements.
A clear regulatory path
The UK should pave a clear regulatory path that guides FinTechs through a step-by-step approach that allows for the progressive development of their risk approach over time, with defined priorities and milestones, fostering a supportive environment for innovation and sustainable growth rather than imposing sudden vertical climbs.
A culture of learning and development
Regulators and government should cultivate a culture of mutual learning and development with the UK FinTech sector, fostering an environment where regulators and FinTech firms collaborate to continuously improve, share knowledge, and adapt to evolving challenges. This culture should be underpinned by a willingness to learn and collaborate and the application of technical knowledge and first-hand experience when designing regulation.
Members have shared that when engaging with public officials and regulators, they found both had very little experience with their FinTech product. This presents a challenge where the frame of reference can often be extreme use cases in the media or incumbent products and how they work, which then leads to policy and regulation with unintended consequences.
Future-proofing and a world-class, forward-thinking regulatory regime
UK regulation should be future-proofed, world-class, and forward-thinking, embracing a proactive approach when designing or updating its regulatory regime that can swiftly adapt to the rapid pace of change in the FinTech ecosystem.
In the context of the UK’s ‘Twin Peaks’ method of financial services regulation, this entails a joined-up and collaborative approach between regulators and government to aptly identify and explore emerging regulatory issues and, where appropriate, gather early warning signs, in collaboration with FinTechs, fostering an environment that nurtures innovation and develops future-oriented approaches.
By leveraging RegTech solutions, regulators can achieve better regulatory and consumer outcomes, enabling their teams to anticipate, understand, and effectively address emerging issues, thus positioning the UK as a global leader in driving innovation, competition, and consumer protection to deliver sustainable growth.
Key metrics
To achieve these desired outcomes, we propose the following key metrics that regulators should consider publishing. These metrics are designed to provide transparency, accountability, and insights into the regulators' performance and progress in key areas, namely the regulatory rulebook, market oversight and supervision, licensing and authorizations and capacity, culture and capability.
Regarding the format and frequency of publishing these metrics, our members would like to see each regulator publish sector strategies with more granular, sector-based analysis, desired outcomes and metrics to demonstrate its progress, as the FCA used to do. This strategy should explain how the regulators will approach each ‘vertical’ in financial services, including fast-growing areas such as cryptoassets and Buy Now, Pay Later or emerging ones including Web 3.0 and embedded finance. This would allow Government to regularly assess the effectiveness of their strategies in fostering a competitive environment and provide more certainty for firms and investors on the future regulatory landscape.
The regulatory rulebook
Metrics focusing on the regulatory rulebook aim to assess the clarity, accessibility, and proportionality of regulations. By measuring the simplicity and consistency of regulatory requirements, regulators can facilitate innovation, reduce unnecessary compliance burdens, and foster a supportive regulatory environment for small and scaling innovators and disruptors.
| What action is needed? | Metric |
| Updating Existing Rules to Enable Innovation | Number of new and updated rules with comparative analysis with other jurisdictions in the previous twelve months. |
| Annual comparison of rulebook size or volume with key competing markets (e.g. US and Singapore). | |
| Report on the number of removed rules that are found to overlap unnecessarily, particularly where new ‘outcomes-based’ regulation is introduced (e.g. Consumer Duty). | |
| Proportionality and cost-benefit analysis reporting and evaluation |
Number of instances the regulators have changed or abandoned proposed regulation as a result of a proportionality or cost-benefit analysis. Qualitative reporting should accompany this metric to explain how proposals were expected to impact innovation and international investment in the UK market and when policies that risked a significant negative impact on innovation and international investment (accounting for uncertainty) were abandoned or reformed. |
| Proportion of regulations enacted following a cost-benefit analysis that found the proposals to be net-beneficial for competition and innovation. | |
| Reporting on costs and benefits to businesses | Reporting on the cost regulations create for business (as required by the Enterprise Act) aggregated by sector verticals and presented alongside the benefits they bring to provide a comprehensive view of a regulation’s impact on innovation and competition. |
| Machine Readability of the Rulebook | Percentage of the rule book that is machine-readable, facilitating RegTech and SupTech applications. |
| Percentage of mandatory reporting standards collected through the eXtensible Business Reporting Language (XBRL) format for improved accessibility, efficiency and implementation of RegTech and SupTech solutions. | |
| Clear, Navigable and Accessible Guidance | Percentage of rulebook and regulator’s websites in compliance with the Web Content Accessibility Guidelines, as published by the World Wide Web Consortium. FinTechs have talked about the benefits of the PRA’s “plain English” guides for new banks. |
| Engagements with industry | Number of consultations, sprints, webinars and other events targeted at start-up, scale-up and high growth FinTechs. These engagements must be made accessible by considering the resource constraints these businesses face. |
| Future-proof Testing | Percentage of new rules and proposals which undergo and sufficiently withstand robust and evidence-based tests that assess the impacts of a regulatory proposal on small and scaling businesses within remit and unlock new RegTech, SupTech and Smart Data solutions. These tests are expanded on below. |
| Start-up and scale-up test: the regulator should consider how proposed rules and standards demonstrate the potential to foster competition, innovation, and growth by minimising barriers to entry, promoting market access, and providing sufficient flexibility for agile start-ups and scale-ups to thrive. | |
| RegTech/SupTech test: number of proposed rules and standards that leverage innovative regulatory and supervisory technology solutions from the outset to streamline compliance processes, reduce costs, and facilitate competition and innovation by reducing the regulatory burden for small and scaling businesses. | |
| Smart data test: number of proposed rules and standards that unlock the ability to enable secure and efficient data sharing between sectors and industries to support the development of third-party applications, and foster competition, innovation, and growth in the data-driven ecosystem, subject to the end user’s consent. |
Market oversight and supervision
Metrics related to market oversight and supervision enable regulators to demonstrate effective monitoring and enforcement practices, especially over novel and technology-driven applications. These metrics assess the regulators' ability to identify emerging risks, promptly respond to market developments, and maintain a level playing field for all participants.
| What action is needed? | Metric |
| Sandbox Engagement | Report on the number of participants accepted into the sandbox program. These figures should be disaggregated by firm size and supervision area (or ‘vertical’) and funding stage. |
| Sandbox Evaluation | Evaluation of sandbox programme through each stage after exiting, including success rates, market adoption (e.g. through commercial partnerships), time to market and funding raised. These evaluation metrics should also be disaggregated as above. |
Licensing and authorisations
Metrics in this category focus on the efficiency and effectiveness of licensing and authorization processes. By measuring the time taken for licensing decisions, the clarity of requirements, and the proportionality of assessments, regulators can provide a conducive environment for new entrants, ensuring a streamlined process without compromising regulatory standards.
As raised in our Treasury Select Committee inquiry on the cryptoasset industry, members have shared numerous stories raising concern about the AML authorisation process for crypto firms, with churn in the teams running the process, a backlog of applications and purported resetting of the clock to avoid going beyond agreed deadlines. We also know from talking to the FCA that there was a mismatch in expectations on the part of some crypto firms, and in many cases, their applications showed a low level of understanding of the requirements around compliance and governance. We would encourage the FCA (and other regulators) to develop a better pre-application process and guidance to enable firms to understand better what will be expected and what they will need to demonstrate. Key Performance Indicators (KPIs) for approval processing need to be met.
| What action is needed? | Metric |
| Reporting on authorisation KPIs. | KPI reporting aggregated by firm size, supervision area (or ‘vertical’) and funding stage. |
| KPIs reported by authorisation and licence type and the average time taken to authorise from the date of the application being submitted to the final authorisation; (e.g. cryptoassets: AML / CTF regime, authorised electronic money institution, Senior Management & Certification Regime, use of a full or partial internal model). | |
| The number and proportion of applications overdue by more than 30 days. | |
| Approval and rejection rates. This should include qualitative lessons learnt including case studies of where firms have failed in an application and the reasons for delay and/or refusal. | |
| The number and proportion of applications which were withdrawn by applicants, at what stage these were withdrawn and the reasons for withdrawing. | |
| Touchpoints with start-up, scale-up and High Growth Firms | Availability and frequency of use of communication channels dedicated to supporting start-up, scale-up and high growth firms in their licencing and authorisation journeys. |
| Speed and timeliness of authorisations | Assign a new application to a case handler within 5 days of the application being made and measure the average time it takes to do this. |
| Complete an initial application review within 14 days of allocation to a case handler and measure the average time it takes to complete the review. | |
| Allow a period of no more than 21 days to allow for questions and responses and measure the average number of days it takes to complete an application in full. |
Capacity, culture and capability
Metrics addressing capacity, culture, and capability evaluate the regulators' readiness to respond to the evolving needs of the FinTech sector. These metrics assess factors such as expertise, resourcing, training programs, and engagement with industry stakeholders to ensure regulators possess the necessary skills and knowledge to effectively regulate the dynamic FinTech landscape.
A joined-up regulatory approach should underpin all industry engagements moving forward. Piecemeal engagements by separate regulators and quasi-regulatory bodies make it hard for firms to take a holistic view of the regime, and fully understand the consequences of the various components, their dependencies and interactions. Such an approach creates unnecessary uncertainty and risks unintended consequences which make longer-term planning more difficult for smaller firms and their investors. As these firms inevitably have limited resources, it is difficult for them to consider multiple, simultaneous regulatory changes in the round.
We recognise that we have suggested more input metrics here, rather than outcomes. These metrics are intended to prompt a shift in culture as well as the capacity and capability of the regulator and at this point in time we consider that it may be helpful to specify some input measures.
| What action is needed? | Metric |
| Vacancies and Turnover Reporting | Number of staff vacancies in each departments broken down by seniority. |
| Turnover, or ‘churn’, through the average time a position is held. This should be aggregated by division, team and seniority. | |
| Industry Experience | Percentage of staff with former industry experience, broken down by time spent in industry. This should be aggregated by division, team and seniority. |
| Number of staff partaking in a secondment programme, with colleagues from the FCA or PRA and FinTechs spending time in each other’s organisations. These can include a range of programmes from a ‘week in FinTech/Regulator’ to a formal six-month or two-year secondment to a specific role. | |
| Training and Development | Number of staff completing Continuous Development Programmes focused on developing an understanding of technology in financial services. |
| Biannual skills and tech audit assessing regulators’ proficiency in emerging technologies and ability to apply digital skills to their roles. | |
| Industry Engagements | Number of industry ‘learning’ engagements (events, workshops, sprints) specifically targeted and tailored for start-up, scale-up and high growth firms. |
| Joined-up Regulatory Approach | Number of collaborative engagements between regulators, such as events or consultations. |
In summary
The metrics we have suggested align the regulators towards the primary desirable outcome: to make the UK the best place in the world to start and scale a FinTech. The passing of the Financial Services and Markets bill which enacts the new secondary growth and competitiveness objectives represents an opportunity to course-correct and ensure the UK’s regulatory initiatives align with evolving market dynamics, fostering a conducive environment for competition, innovation and growth.
To achieve this, the table below describes how our suggested metrics would support the three key pillars for a world-class, forward-thinking and future-proof regulator.
| 1. Fit for purpose: updating existing rules | 2. Fit for the future: enabling innovation | 3. Innovative, agile regulators |
| Updating Existing Rules to Enable Innovation. | Machine Readability of the Rulebook. | |
| Impact Assessments for New Rules and Standards | Clear, Navigable and Accessible Guidance | |
| Joined-up Regulatory Approach | Future-proof Testing (start-up/scale-up tests, RegTech/SupTech tests, Smart Data tests. | |
| Engagements with industry (sprints, workshops, consultations). | ||
| Sandbox Engagement & Evaluation | ||
| Reporting on Key Performance Indicators (KPIs) by sector for licencing and authorisation. | ||
| Touchpoints with start-up, scale-up and High Growth Firms for licencing and authorisation. | ||
| Vacancies and Turnover Reporting | ||
| Industry Experience | ||
| Training and Development | ||
