1067. Insights: Can regulation become fintech’s biggest enabler?

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1:11Welcome to Fintech Insider Insights from 11FS. I'm Benjamin Ensor. I don't know about you listeners, but I've always thought that one of the most difficult jobs in financial services is being a regulator. It's very, very easy to spot risks with hindsight. It's a lot harder to foresee problems in advance. And for years, we've heard people at financial services firms framing regulation as the thing slowing innovation down. But regulators themselves are often trying to do the exact opposite, from AI sandboxes and open finance frameworks to reviewing the boundary between financial advice and guidance.

1:48Regulators around the world are actively trying to create environments where firms can innovate safely and responsibly. So if the opportunities are there, why do firms still hesitate? And what does modern regulatory collaboration look like? Those are some of the topics that we're going to try and explore today in our episode. And to do that, I'm delighted to be joined by Colin Payne, Head of Innovation at the UK's Financial Conduct Authority, or FCA. Hello, Colin. Please would you introduce yourself to our listeners and the FCA, especially for our many international listeners who might not be quite so familiar as some of the British listeners?

2:26Of course, it's great to be here. Thank you for inviting me. I am Colin Payne. I'm the head of innovation at the FCA. Now that means that I, as you say, there's a lot of questions that arise immediately when I give my job title. Most people ask how can a regulator be innovative or how does that work? What does risk and innovation work like together? How does that work? And we do our best to try to decode that and to then bring it to the market and to help people understand that actually innovation done in a safe and secure way is one of the unlocks that allows regulation to move fast, which is perhaps something new for people to discover.

3:07I'm also the chairman of GFIN, which is the Global Financial Innovation Network. So in terms of an international reach, I have 98 global regulators as members of that body. And I share them. And again, we look at ways to innovate and build bridges across borders in terms of innovative ways of working and activities that are going to help all of our markets thrive and flourish. I'm sure there are many listeners who applaud the alignment between regulators. Everyone working at an international financial services company is delighted when all the regulators agree on a similar or the same approach.

3:44We're also joined by my colleague, Kate Moody, who is a Customer Strategy Director at 11FS and well known to many of our listeners. But briefly for anyone listening for who's this is the first or second episode of Fintech Insider, can you introduce yourself? Yeah, absolutely. So I work alongside Benjamin at 11FS in our sort of consulting ventures team. When we're not waffling on the podcast, we also work with banks, financial services institutions to help and design hopefully the next generation of financial services. So my role within that is often to lead a lot of our customer research, primary research to speak to customers, whether that's retail customers, small business owners, all the way up to financial decision makers at major corporates to really try and understand what are the current jobs to be done in their financial lives that are underserved and how might new products and services move the dial for them.

4:34So yeah, I'm really excited to get Colin's perspective and really keen to kind of understand how we can continue to support those companies and firms that are really trying to push the boundaries in financial services. Fantastic. Well, let's dive in. And let's start with this perception that we often hear in the industry that regulation is a barrier to innovation. And I think it's a really good question of, is that an excuse by people who don't really want to innovate? Is it fair? Is it okay? Is it justified? Do we want innovation to be a little bit more cautious in financial services than in, I don't know, fast moving consumer goods or other sectors?

5:16Colin, we hear it a lot. I imagine you get it thrown at you occasionally. Do you think that sort of tension between regulation and innovation is fair, is justified, is reasonable? I think it's healthy. It's an interesting philosophical thought as to when you're in a regulated industry, should you be moving at the kind of pace that we would expect with innovation? But you see innovation in the medical industry and you see it done within an experimental format where it's done safely and with the consideration of the patient in that case. And it's exactly the same in financial services. It's complex, and you alluded to it right at your intro.

5:54I mean, this is a deep subject. It's complex, and it really counts both for consumers, but also the wider system and the economy. So it is important to regulate within the guidance that you're looking for. But if you can innovate with inside those guardrails, and allow firms to move faster, but safely and securely. That's the kind of the golden, if you like, the golden prize at the end. It's a bit of a balancing act, but I firmly believe that good regulation balanced with good innovation is the best of both worlds. What do you think, Kate? Do you think it is sometimes the regulations themselves?

6:41Is it how they're interpreted within firms? I mean often when we are working with banks financial services providers or people that want to come into financial services they quite often come to us with an ask of almost can you go speak to customers and find some sort of completely undiscovered problem that nobody else has ever spotted before and you know maybe sometimes we do but quite often we're finding problems that exist that just haven't been solved for in a compelling enough way and I think a large part of that is about people's ability to think beyond their understanding of the regulations.

7:14Quite often we encounter very well-intentioned, you know, discovery teams, product teams, customer teams within particularly big banks that just have a very set perception about what can or can't be done. So I do think there is a combination, I think it's a combination of both of regulation itself, but I think kind of that cultural piece about how regulation is perceived and interpreted within particularly large financial services organisations is a critical part as well. And often some of the most innovative brands and platforms of financial services have achieved their advantage not because they discovered something that was unknown, but because they've been willing to deliver new services quite often, I think, in partnership with regulators through great design, through great UX, but also just through being a little bit more ambitious about where that regulatory boundary might be.

8:07So yeah, I think there's a huge cultural piece to it as well. Colin, on that note, are there any patterns that you see in firms that sort of navigate this balance between innovation and sort of regulation well? I mean, just sort of Kate's point about culture, are there certain traits that you see in the firms that are maybe able to get that balance between innovation and safety? Yeah, I mean, I think there are. because most of what we run are sandbox and experimental cohorts, it's often those who are perhaps new to the financial services sector that are most excited about diving into an experiment with us.

8:52Certainly that was the case if you go back to our earlier time as the innovation team developed. It's developed over around a decade now. So we've certainly learned lessons through that period. But most recently, I'm really quite pleased that we've got larger firms coming to us now who have equally challenging innovation problems and equally are concerned about the outcomes of those in terms of the regulatory comfort that they get around what we do. So to have large incumbents come and experiment in our AI lab or with our open finance team, these are all new problems for those teams to develop ideas around.

9:32and sometimes it helps having a regulator beside them just to guide and to give the comfort they need to move and progress forward. So that's what we're seeing. It's a slight shift in pattern, but it's certainly true to say it's those who are willing to experiment, those who are willing to move and lean into the problem that are the ones that are most comfortable coming to talk with us. But I think that point about how it is to engage with the regulator, I think it's also fair to say that the innovation department gives you a different experience to the supervision and enforcement teams. Those guys clearly have a different job to do.

10:13So I think, I mean, the regulator is a broad church, let's put it that way. So I guess, you know, it really depends how you're engaging, what you're needing to find out. And actually, that's a little bit of the communication we have to do is to explain that there are teams that you can engage with early in the process to ensure that you don't have to engage with other teams a little bit later in the process. Kate, this reminds me of sort of agile development and, you know, the way in which digital businesses operate and think, and you're really trying to get everyone in the room, compliance, risk, security into the room at the beginning of projects.

10:47And actually, what I think we're sort of hearing from Colin is bring the regulator in too. I mean, you probably can't get them on your staff full time. Yeah, no, absolutely. Again, if I think back to some of the organizations, we were very lucky, I think, to work with the team at Standard Chartered in the early stages when they were building out MOX and Trust Bank in Hong Kong and Singapore. And I think both of those teams, I think, had a great attitude towards the regulatory authority in Singapore, you know, were working, had a very strong relationship with them. I think we're going to them in a very iterative process with their ideas, their emerging roadmap.

11:20So again, yeah, I think definitely when I've seen it work really well, I definitely agree people have really brought, tried to bring the regulator into that innovation process early, even before some of the initiatives that you described, the sandboxes and stuff, have become so much more prevalent and are reaching wider parts of the market. I think it's also some of the best internal innovation cultures I've seen have also just had risk and compliance teams internally that have just really wanted to get into the innovation process as well. You know, if I've been playing back things we've heard from customers about like their pain points and their frustrations, again, like some of the best teams have had individuals who've come in from the risk and compliance teams and have wanted to hear that feedback almost as much as a product team.

12:03So I think, again, I'm really trying to think about how you, yes, how you structure that kind of communication between yourself and organisation and externally kind of the regulatory bodies that you're aligned to. But also thinking about how you create that right dynamic between internal teams as well, like between the risk and compliance functions in the bank, who could either kind of come in and really be almost like a cheerleader for change and an encourager of change versus risk and compliance functions that kind of make everybody a bit frightened and everyone wants to kind of hide their ideas from them until the last minute because they think they're just going to say no.

12:35So again, I think that can have a huge bearing as well. And a lot of the companies that we work with, especially again, not to just be mean about large companies, but again, they quite often have such significant internal stage gates to allow, need to be able to get an idea to the next level of sign off, to show it to the board, to show it to the senior. There's so many steps to get through that I think people are even more hesitant to really push the boundaries because they don't want to invest all of that time and probably kind of money as well, exploring an idea that someone's just going to say no to.

13:10So again, people are really, it encourages people to play safe a lot more than I think is in the interest of consumers, but also kind of the wider market as well. I think the interesting thing is that's the same for us as well. So where we've really, I think, step changed in the UK over the last couple of years is running policy sprints alongside the work that we do. So one of the most successful pivots I think my department's made is to start bringing in policy teams whilst we're doing the tech sprints. So the tech sprints have been around for some time and they've always been held up as a kind of gold standard globally for exploring areas of interest whether that be crypto, whether that be any other area of emerging technology.

13:56But if you take the way we're now working with policy teams at the front end and then building those feedback loops into the policy build, whether it's AI, whether it's crypto, all of those have benefited from the data gathering that we've done with industry. So for me, it's about harnessing the expert industry, bringing them into us, working with them, bringing policy alongside, bringing authorizations alongside, so that actually what we build is a really firm foundation with all of the constituent parts of the FCA being involved in that process. It means there are no surprises, you know, three, six months down the line.

14:33When you get those more traditional engagement models out of policy, they're informed by something really cutting edge. You know, they have the data. and I actually don't think there's another regulator doing it in the way that we do it and that acceleration, you're seeing it in the market now so it's not only accelerating the firm's success in the market it's actually improving the FCA's policy control systems and how we actually then build that into a new framework or a new policy output so I think it's really exciting and I think that's about bringing the right people in the room It's as simple as that.

15:12It's actually not complex. It's like, get the people in the room, whether it's compliance, whether it's risk, whether it's authorizations, and get them understanding each other. And then you can move fast. And then you don't necessarily need to break anything. It's like moving fast and making things rather than breaking things. I'm very interested in what you're saying about acceleration and moving fast, because I think if we look at the financial services, frankly, we look at the whole sort of world economy. We are in this period of intense, rapid, rapid change. And there's been change, has been acceleration for a while, but particularly, I think, with AI.

15:45I mean, there was already, you know, blockchain and big data and all sorts of other things. But AI in particular is really accelerating the rate of change, the possibilities. I mean, you look at, you know, I'd hate to be in cybersecurity. I mean, it would be incredibly exciting and also incredibly frightening all at once. But, you know, AI in particular has this huge role. And, you know, the FCA has been actively exploring AI sandboxes and innovation. How are you trying to think about helping firms experiment safely when you've got technologies that evolve so quickly, when you've got technologies that do things like hallucinate and so on, and potentially creating new risks, unknown risks, risks that are incredibly difficult to foresee.

16:29And I realize that's not all on you, but how are you and your colleagues and other regulators sort of trying to think about how do we deal with the rate of change being brought by AI? Because it's just so hard to foresee all of the risks. I mean, you're asking someone who's in innovation, has been working in innovation 30 years, if they're worried about change. and, you know, not really. It kind of has kept me employed for quite some time in the digital transformation business. However, you're right. I mean, I think the rate and the extent of the change and the potential for the significant pivots in every area, whether it's workforce planning, whether it's product release, whether it's even the fabric of FS, to quote 11FS themselves, the fabric of this stuff is changing rapidly.

17:19The way we've approached it is really straightforward. I felt that we needed an industry-capable platform. So I don't tend to call it sandbox very much anymore. What we've built is something quite extraordinary. We built an AI lab which has elements of investigation. I mentioned policy sprints. That's one small element within the AI lab. But also we spotlight AI firms. We spotlight AI services. we are working with an input zone that's currently open for input at the moment from firms that are working in the industry looking at their uses their good experiences their poor experiences we gather this data i mean we are primarily an intelligence gathering unit and then we experiment with that data so we do have a platform which is the envy of the world i partnered with nvidia i partner with AWS.

18:14NIA1 built the platform, a great UK platform company. We've created some of the most extensive data sets, synthetic data sets available in financial services. And so when we invite, as we are doing at the moment, we've got an open cohort for people to come in and express interest and join and apply. When we provide them with a platform to work on, It's capable of doing more or less anything they need it to do. So you're leaning in with the quality of technology and the quality of understanding that allows firms to get, again, get comfort from the regulator that really understands the underpinning technologies.

18:53So all of that is in place. All of that, as I've said, informs our policy frameworks as well. So it allows us to be quite clear that we're tech positive and that we're moving forward supporting AI. that doesn't mean we're unconscious in terms of the risks of course it doesn't we've got a very balanced view on this so we're aware of the risk but we're also very aware of the risk of not doing something so whilst we we understand um hallucination was a word that was used a lot a couple of years ago um i would start to suggest that hallucination is being used a lot less in the world i mean when you see the um frontier models working currently um you don't see a lot a hallucination.

19:35But there is equal or perhaps worse to come in terms of risk. So we're mindful of that. And of course, we work on that on a daily basis to balance our understanding. But a regulator that doesn't work in the trenches with the firms can never understand what the upcoming technology changes are going to bring. So the simple fact of us being in those trenches, building products, understanding, for example, I've just purchased three GPUs to run in the the innovation team, so there's three Grace Blackwell units, we are going to be spinning up already our agent base to allow us to understand what we can do as a regulator with agents and what that impact might be for our supervision teams, what that might mean to the firms that are coming in to work with us.

20:22So it's all about knowledge build. It's all about finding value. And it's all about the regulator working alongside the industry to really find out where the weak spots are and where the opportunities are most importantly you know where we can really flourish uh in the uk environment fantastic one of the topics we wanted to ask you about actually putting our sort of uk hats on is um the advice guidance boundary and targeted support which to my mind is a is a hesitate to say overdue because that seems a bit harsh but you know a long-awaited um review of because i think you know there's a classic example of sort of unintended consequences that lots of people didn't get the advice that perhaps they needed, the financial advice.

21:06Kate, are you excited about targeted support? I'm really excited about the fact that there's a change, right? Because I think what I've seen in my years at LemonFS is too many firms just being terrified of this boundary, you know, people terrified to tread the wrong side. And rightly so, because, yeah, when it's misapplied, obviously, there can be really, really bad outcomes for customers and for organizations. So definitely, I think it's hugely positive that there is movement towards it. I guess we're starting to see now who the first cohort of organizations are that have applied for these permissions, how that will actually translate through into the propositions they offer to customers.

21:47So I suppose excited, but also holding my breath to see what it actually means in terms of how it's applied in practice and through products and services. Because it brings together some of these themes, doesn't it? Because of a tremendous and obvious potential for sort of conversational AI and chatbots to potentially give people financial advice. And of course, you know, the risk that perhaps they go off and, you know, seek it from general purpose chatbots that are not intended for providing financial advice. Yeah. What, Colin, what should firms that are trying to implement a new regulation like targeted support, how should they be talking to and working with regulators?

22:22I think it's the process we went through was really interesting with the advice guidance boundary review because we did run it as a tech sprint with industry. So we got that kind of, again, that goes back to that data-driven, data-led approach to regulation. And I think we were pretty much on the front foot. Whilst it's taken time, we knew where we had to get to. And the industry is cautiously optimistic in terms of moving towards the same viewpoint. I think, as you rightly say, we've had a small number of applications that have come through. We've actually given, already we've granted licenses to five firms.

23:06So I think the industry is watching that really carefully to see how successful that is. There's no question that your point around general purpose models also being available. The news a few days ago that OpenAI was connecting into Plaid, for example, and just pulling open banking data from 12 ,000 institutions potentially is an indication of where things may travel to. We want to make sure that our market gives a sound platform for people to seek proper, good, quality advice. Now, I'm not saying that general purpose models can't do that. when they obviously have a place within the hierarchy of the advice.

23:54And certainly, I mentioned medical before. I think I know lots of friends of mine who take some solace in medical advice taken from general purpose models. That doesn't make them doctors. But to double check, to get a voice of reason, to maybe investigate deeper the backgrounds of certain areas of medication, for example, I think that's a really positive thing for society because for a fairly low cost, you get a reasonably good sense check, if you like, of some of the work in your life. And I don't think it's dissimilar in financial services. You know, the ability to have more tools that help us educate ourselves financially, I'm all for it.

24:39But I do think it's education that you're getting through that channel. whereas actually what we're talking about is the targeted device that you actually will benefit from and as I say I think I think the way to do it is is to apply through our standard channels or indeed to set up within one of our sandboxes and explore what this might mean for you I would encourage any firm who's on the precipice of going down this route to actually come in because we have a lot of expertise which we can share and that should make your journey simpler, easier, and quicker, which is really the objective of our department is to really cut down that route to live difficulty and to make things a little bit faster and easier for people.

25:21Fantastic. All right. Well, on that note, we will take a short break and then we will come back to explore more about AI platforms and the future of financial regulation.

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