Technology led innovation can cause much indigestion for conduct and prudential regulators as they try to find the right regulatory pigeion hole for innovators in their regimes that were not built to handle such innovation. It is this disruptive impact of innovation that is shaping the regulation of tomorrow.
Numerous conduct regulators around the world have acknowledged that a mandatory disclosure regime for financial products and services has its shortcomings and does not adequately protect consumers from their poor purchasing decisions.
While new technology and innovation in financial services have the potential to address some of these shortcomings, the Australian regulatory regime does not yet adequately facilitate such change. However, Australia is not alone in this experience, in what is fast becoming a common story in highly regulated markets around the globe.
Embracing innovation – UK response
A new regulatory approach is required. This was the clear message that was sent to the UK Financial Conduct Authority (FCA) as part of its industry consultation process named Project Innovate.
The FCA was the first regulator to herald the next generation of regulatory reform that is gathering pace around the world. According to Imogen Garner, London partner of Norton Rose Fulbright, in the past year the FCA has been responding to the phenomenal pace of technological change with a new focus on, and openness to, innovative business models in the financial services sector.
In October 2014, after the end of that consultation process, the FCA created an Innovation Hub that allows new and established businesses to introduce innovative financial products and services in a way that complies with the regulatory requirements and meet the expectations of consumers.
An important feature of the new Hub is the FCA’s willingness to give informal steers to innovators where there is uncertainty in the application of regulatory requirements to new technology and innovative processes, which are intended to encourage and facilitate such innovation.
ASIC’s renewed focus
By now, it should be no surprise to know that ASIC is strongly encouraging this innovation, as outlined in ASIC’s submissions to the Financial System Inquiry (FSI).
ASIC recently released its Strategic Outlook paper, which sets out its key challenges over the next 12 months. Amongst them is the important and recurring theme of ‘digital disruption’ in financial services and markets.
The challenge is to facilitate such innovation while ensuring that effective controls are in place to protect consumers and the integrity of the financial services industry. These have been the consistent messages in recent speeches by Greg Medcraft and Greg Tanzer, mostly recently at the Financial Institutions Symposium at Norton Rose Fulbright in Sydney.
There is no doubt that ASIC is keenly watching and actively engaging with the FCA (and other regulators) in relation to digital disruption.
ASIC is also currently consulting on the regulatory relief to be provided to facilitate electronic delivery of financial services disclosures and to facilitate the use of more innovative disclosure documents.
The regulation of tomorrow has finally arrived in Australia, and not long after its arrival in the UK. If you want a flavour of what’s ahead for us, ask our UK colleagues and visit the FCA’s website.
“This regulatory innovation is the new frontier”
ASIC recognises the benefits of encouraging the industry to explore new ways of delivering mandated disclosures to meet consumer expectations, and to facilitate better understanding of financial products and services.
While the “benefit” is clearly in the detail of such relief, it is encouraging to see ASIC proactively engaging in this regulatory innovation.
InstaBan – intervention and banning powers
While the regulators, locally and abroad, are open to this “touchy feely” facilitative approach, they still want strong enforcement powers to deter non-compliant behaviour, said Kathleen Scott of Norton Rose Fulbright in New York.
As part of their wish list, they want to put the onus on product providers to build suitable products and to use appropriate distribution channels to sell them. To enforce these obligations, the regulators want product early intervention and banning powers (InstaBan) and the ability to impose higher fines (InstaFine).
The UK regulator has these powers (and has used them to ban certain product features) and ASIC wants them too, as is evident from its second FSI submission.
There’s a good chance that ASIC will be given those powers in due course, so it may only be a matter of time.
Regulators get techie!
We are entering the time of InstaBans and InstaFines (forgive my use of internet jargon), where the regulators no longer come knocking – they cyber serve you and access all information using new forensic technology; despite what anyone says, everything is searchable and recoverable in the digital world.
Damaging media releases by the regulators can be tweeted and go viral on social media, inflicting reputational damage that can become a public relations nightmare.
Remember that social connectivity is available to all – even the regulators – and the tide of public opinion can be quickly turned against you … even before you launch your product.
This blog is part of the Innovation and Disruption Series by Norton Rose Fulbright. You can register here to receive these blogs by email.