“The only thing that is constant is change,” according to Heraclitus. The financial services industry laments the constant change that has been thrust upon it –often haphazardly – by successive governments. Paradoxically the same naysayers who pooh-pooh change fail to grasp that, if the industry did provide real innovation, intervention by inept politicians may diminish.
In its defence, it is conceivable the industry is so abused, constantly punched by the latest government vagaries, that it is happy to stay down and concede the fight. Insurance companies and banks blame their innovative shortcomings on the overbearing Financial Conduct Authority (FCA). The juvenile retort from banks is that innovation doesn’t work in the highly regulated UK market, so the only option for growth is to relocate their luxurious head-offices to Asia.
The pension freedoms changes were a typical example of the absence of disruptive innovation. Providers did not embrace the change, concerned that their assets under management would diminish. Banks and insurance providers will feasibly do anything to protect themselves; customers taking money out is not aligned with their shareholder-focused, strategic purpose. The pensions minister, Ros Altmann, has often criticised providers for ‘failing to move with the times’.
Conceivably the FCA must drive innovation and work with the industry, not simply regulate it. The FCA has recognised this need, launching Project Innovate in October 2014, with the aim to encourage innovation in the interests of consumers.
Arguably, the previous chief executive of the FCA Martin Wheatley’s approach to regulation and creating disruptive innovation were misaligned. The FCA appeared focused on hard-line regulation, punishing banks with enormous fines and undertaking widespread investigations, hardly the environment for new distributive technology companies to be received.
The FCA needs a new, modernist regulatory approach. With Andrew Haldane tipped to be the its new chief executive, perhaps we will see a new age of simple regulation and innovation. Haldane is currently chief economist at the Bank of England. In 2014 he was named among the world’s top 100 most influential people by Time magazine.
In his famous ‘Dog and the frisbee’ speech he explored the complexity required in order for a dog to catch a frisbee. The task involves the laws of physics, gravity and velocity, all unknown to any dog, yet it is easily accomplished by the animal instinctively by following simple rules of thumb. It is a brilliant metaphor, you don’t need complex laws and regulation to get the right outcome. According to Mr Haldane “In financial regulation, less may be more.”
Haldane is big fan of peer-to-peer lenders such as Zopa and Funding Circle and would encourage new lending markets like crowdfunding to try to move away from the current banking culture. Haldane is aware the current regulatory system is far too complex to drive innovation. In 2013 he stated “it is difficult to escape the conclusion that the current regulatory system, however well-intentioned, needs root-and-branch repair.”
He also believes there is a case for banks to look after all stakeholders rather than just shareholders.
Who would argue against Mr Haldane, that complex financial systems and markets cannot be controlled with complex regulations? Whoever does succeed Martin Wheatley, they must create synergy among all financial services stakeholders. To actively encourage new entrants the financial markets needs ‘Frisbee regulation’ – a simple, understandable, intuitive system concentrated on meeting the needs of the industry and consumers.