Regulation rethink: The importance of technology innovation

Today’s consumers expect to see the latest technology when dealing with their bank, such as 24 hour mobile access to accounts, and therefore financial services organisations are under increasing pressure to offer their customers innovative services. The reported lack of clarity in the Financial Conduct Authority’s (FCA) regulations, however, has made many banks cautious about adopting these advances as they may lead to further confusion and raise fears that companies may be at risk of unwittingly breaking the FCA’s code of conduct.

In today’s constantly evolving regulatory landscape, many firms are struggling to adapt to different legislative changes that have significantly impacted the way they do business, whilst also trying to address their customers’ needs at the same time. As if this weren’t enough, firms are also tasked with attracting and retaining clients, driving down operational costs, and achieving compliance – whilst also proactively developing more innovative services.

This year brought good news for the sector, however, when the FCA announced the decision to review its position on technology and innovation. Prior to this, the FCA had come under fire from many different financial service firms, including traditional lenders and the more disruptive challenger banks. Many of these businesses claim that the lack of specific regulation around innovation within financial technology has inhibited the adoption and use of digital and mobile solutions for their customers.

Juggling innovation and regulation

With new regulations on the horizon, the case may be that firms are hesitant to move beyond the legacy systems that have been used for decades, in some instances because of perceived approval by the FCA. The importance of the valuable data stored in these systems has also led to a cautious approach to updating them, but cloud-based technology has changed all that. In fact, cloud may be the key that finally releases firms from these outdated systems and allows them to compete with emerging challenger banks and other disruptive players.

Innovations in financial technology have also facilitated advances in the way that banks and customers share data. With the correct systems in place, firms are able to streamline services to cater for individual customer needs. The multiplicity of benefits available from adopting technologies like these means that the FCA’s announcement should be welcomed by both customers and firms.

Mobile applications that offer instant access to accounts and product information are at the forefront of these changes. Firms are already seeing the direct benefit of adopting these innovations, as they are now able to communicate with their customers and understand their needs far more quickly and efficiently. For agile new lenders that are not inhibited by old legacy systems, this is a much easier task.

However, it will be very interesting to see how these new players compete against traditional firms. If the challenger banks fail to take a proactive approach to stay one step ahead, they risk losing their competitive edge and may lose out to traditional banks that have already developed large, well-established customer bases and have access to increased data as a result. Mid-market firms may also find regulation harder to interpret compared to larger institutions which have the resources to interpret the regulations.

Bespoke software: Necessity not luxury

At the moment, it is very difficult for off-the-shelf IT solutions to meet the FCA’s full requirements, as one size simply does not fit all. Instead, firms should consider adopting bespoke, hybrid solutions that have been created specifically with their business goals and FCA guidelines in mind.

Bespoke technology not only addresses a company’s needs more adeptly, but it can also be tailored to meet current FCA regulations as well as adapt to future changes. The inflexibility of regulations is matched by concerns over the lack of tailored solutions, with 49 per cent of respondents in a recent PwC report saying regulatory uncertainty is a challenge for FinTech.

Some still question the FCA’s wider approach to regulation and its lack of specific technology focused rules. The FCA’s argument is that unlike other areas of regulation, new innovations are happening at such a rate that any financial conduct rules could become obsolete almost as soon as they are sanctioned. However, the confusion surrounding certain rules has led some companies into difficulties with costly system patches and FCA penalties.

Although the specifics of the new FCA regulations can only be estimated at this stage, it is clear the importance of regulating FinTech is going to continue to grow for financial services. As such, companies that choose to adopt bespoke innovations will now see themselves well equipped to deal with future changes to both customer needs and FCA regulations.

Scott Underwood, Head of Solutions Consulting at Niu Solutions

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