Consumer Duty and fintech innovation
Season 3, episode 4
Listen to the full episode here.
In July 2022, the FCA published its Consumer Duty. Regulated firms need to implement the new rules by the end of July 2023 for open products and July 2024 for closed books of business.
Firms will need to review their products, communications and customer journey.
It will impact most areas in those organisations such as governance, reporting, product design, pricing, distribution, servicing and staff training.
In this podcast we will review the key principles, ask ourselves what the impact on both established firms and fintechs is as well as exploring innovative technologies that can help adhere to those new rules.
Guests:
Venetia Jackson – Senior Associate at Pinsent Masons
Joseph Twigg – Founder and CEO at Aveni
Chris Ansara – Founder and CEO at docStribute
Important changes for fintechs as R&D tax relief regime changes
Blog written by Saifur Rahman, Senior Technical Consultant at Leyton.
The UK’s Research and Development (R&D) tax relief regime is undergoing significant changes starting April 1, 2023. These changes include the amount of relief that can be claimed, the types of activities that qualify, and how businesses can claim relief. The changes aim to keep the UK competitive in cutting-edge research, ensure that the reliefs are effective, and use taxpayer money efficiently.
R&D Expenditure Categories: The R&D expenditure categories will be extended to include the costs of datasets and cloud computing. This is particularly relevant for the growing fintech sector, as the use of big data and cloud computing is essential for the development of new financial technologies, processes and workflows. Whether you are running a trading platform ingesting financial data from the likes of Bloomberg or developing large scale data algorithms to understand market conformity ”“ the use of cloud computing and pure datasets will be vital in the R&D project and thus have the ability to account for eligible R&D tax expenses. However, it should be noted that such costs cannot be included in R&D claims on an all-embracing basis ”“ for example, where such costs relate directly to R&D activities, they can be included, but not where they relate to a “qualifying indirect activity” (e.g. where you are including a small proportion of non-technical personnel time attributable to qualifying R&D projects). Additionally, exemptions state that the costs of the data and usage cannot be utilised beyond the R&D project or sold on for commercial purposes.
Pure Mathematics: R&D in pure mathematics will also qualify for relief and can form part of the qualifying R&D activities of the claimants from accounting periods beginning on or after 1 April 2023. This is relevant for fintech companies that use mathematical models and algorithm development in their R&D activities. However, the term “pure mathematics” is not yet defined in legislation, further guidance will be provided on this.
Refocusing Relief to UK Activities: One of the most fundamental changes in the Autumn 2021 Budget was to refocus the R&D reliefs provided to activities performed in the UK: for accounting periods beginning on or after 1 April 2023, subcontracted R&D work and the cost of externally provided workers (EPWs) will be limited to work undertaken in the UK. This may present challenges for fintech companies that outsource certain R&D activities to other countries. However, there will be specific exemptions where work outside the UK is permitted for geographical, environmental, social, or regulatory/legal requirements. Examples of such exemptions include deep ocean research and clinical trials, and, by inference, could include medical-tech trials in specific patient groups, international telecoms testing, or technology designed for extreme environments. HMRC will be providing further guidance on the exemptions before April 2023.
Overseas Branch: There is still some uncertainty for companies with overseas branches: currently there is nothing in the draft legislation relating to work carried out by staff of an overseas branch of a UK company ”“ so it is not clear if such costs will qualify for R&D relief in future.
Conclusion: In summary, the changes to the UK’s R&D tax relief regime will have a significant impact on the fintech sector, particularly in terms of the costs that qualify for relief and the focus on UK-based activities. Fintech companies should review their R&D activities and expenses to ensure compliance with the new regulations. We recommend that fintech companies monitor the situation and seek professional advice to ensure they are able to claim the reliefs to which they are entitled.
Photo by ThisIsEngineering: https://www.pexels.com/photo/photo-of-women-talking-beside-whiteboard-3861952/
RegTech, why now is the time to start caring
Season 1, episode 5
Listen to the full episode here.
Financial Regulation Innovation (RegTech) was highlighted in the FinTech Scotland Research and Innovation roadmap published in March 2022 as an essential area of focus for the financial sector.
Understanding and managing regulatory requirements costs financial institutions millions of pounds every year. As regulation evolves all the time to protect consumers, so do new tools and technologies. In recent years new solutions have emerged to help companies reduce cost, better understand requirements, and meet their reporting obligations. Open Banking, AI, Machine Learning and many more technologies have led to increased innovation.
In this podcast we will discuss what RegTech means, adoption within the financial sector and why now is the time for financial firms to consider and explore innovation around financial regulation. This podcast will also be an opportunity to promote the upcoming fintech table event during Scotland FinTech festival.
Guests:
Yvonne Dunn – Partner at Pinsent masons
Callum Murray – Founder and CEO at Amiqus
Financial Regulation ”“ the opportunity for FinTech Research & Innovation
The UK’s approach to financial regulation has been key in enabling a dynamic financial services sector that supports and drives the economy, enables a progressive economic outlook, creates jobs, and plays a significant role as a global financial service centre.
The development of this Roadmap highlighted financial regulation as a priority theme because of its fundamental role in FinTech and financial services, as well as the need for financial regulation to support the positive role FinTech innovation could play in the future of finance.
Regulation remains extremely complex for all those operating in the finance industry. Depending on the complexity of the financial institution’s business model, meeting compliance obligations can mean significant costs.
Industry research suggests that some of the largest global financial institutions are spending up to 5% of revenue on regulatory compliance. Across the UK this could mean the annual cost of demonstrating regulatory compliance is as much as £6.6 billion.
Throughout the development of the Roadmap, contributors highlighted their interest in the role technologies could play in future financial regulation. Some examples are AI, advanced analytics, high performance computing including quantum computing, and distributed ledger technologies.
Priority areas in Financial Regulation
The industry contributors to this roadmap offered a view that the future looks set for significantly more change. Our analysis highlighted three topics of interest:
Simplifying compliance
Helping financial institutions create new solutions and use FinTech to help meet current, continuously changing, and global regulatory obligations.
Future risk modelling and risk management
Reinventing risk management with technology and data analytics, and enabling new approaches to fight financial crime, address fraud and focus on emerging climate risks.
- Reinventing risk management with technology and data analytics
- Enabling new approaches to address fraud and fight financial crime
- Modelling for new and emerging climate risks
Future regulation design
Enabling an agile regulatory framework that works for all, and developing future regulatory oversight or supervisory technology.
- Regulatory reporting
- Interoperability and data standardisation
Roadmap next steps: Financial Regulation
A range of proposed next steps are laid out in the published Roadmap, which specifically identifies 13 actions relating to Financial Regulation, and categorises each into one of three phases over the next 10 years. These actions are illustrated in the graphic below. The report also references 23 different stakeholders who can support the implementation of these actions, which are broken down into research projects and innovation calls.
More information about FinTech Scotland’s Research & Innovation Roadmap can be found here, where the full Roadmap can also be downloaded.
The FinTech Research and Innovation Roadmap
Season 2, episode 1
Listen to the full episode here.
In March 2022, FinTech Scotland released its 10-year Fintech Research & Innovation Roadmap for the UK.
In collaboration with leading universities, large financial institutions, fintech businesses, citizens, industry experts and senior officials this report explores the opportunities that will help the UK maintain its fintech leadership globally.
In this episode we explore what this roadmap means for Scotland and what the next steps are to deliver on the roadmap recommendations.
Increasing industry use of encrypted email to combat cybercrime
Recognition amongst financial services businesses of the need to safeguard emails is increasing in the face of financial cybercrime and they are taking action. Origo’s Unipass Mailock recently marked its one millionth email sent though the encrypted system.
Industry providers such as Aegon and Royal London are using military-grade encryption email services to protect their email exchanges with financial advice firms, and other providers are also realising email protection is now essential.
Cyber criminals hack vulnerable email systems and employ sniffer programs which identify valuable emails and take copies of them, which the criminals can then exploit. For example, in just one email in which a client sends their personal and asset details to their financial adviser, there would be enough detail to help criminals commit fraud.
Putting in place a secure, military-grade encrypted email system, one which protects emails in transit, and ensures that only the intended recipient can access the email, as well as providing an audit trail for compliance purposes, now needs to be thought of as base-level security for product providers and financial advice firms, and without a doubt where confidential and transactional data is being sent.
It is also another way for providers and firms to demonstrate value to their respective customers in the precautions they are taking to safeguard their data.
Origo’s Unipass Mailock system has now surpassed one million emails through the system. Looking at industry benefits, not only has this protected over a million communications between providers, advisers and their clients, but we calculate that this equates to £1.9m saved in print, packaging and postage costs, as well as climate related savings of 459 tonnes of CO2 and 154,000 tonnes of water.
The risk to businesses is not just potentially having to compensate clients for losses, and meeting fines imposed by the Information Commissioner’s Office (ICO), but the effect on client trust and the reputation of the business.
As we move to a more digital advice experience, we expect to see companies of all sizes look to protect this potential point of vulnerability and employ encrypted email as a matter of course.
Standard security protocols advice firms can follow
Some general basic actions businesses can take to help protect their businesses against cybercrime, include:
- Having in place standard items of internet hygiene including firewalls, anti-virus software and a virtual private network (VPN) for off-site working.
- Identifying where the risks to the business lie ”“ are they with providers or are they in unsecured communications with the end client?
- Implementing formal processes and procedures, and staff training, to raise awareness of the potential dangers, and how to protect the business against them.
- Having formal cybercrime processes written into a firm’s policy documents, including written instructions for staff to follow where, for example, fraud is detected.
- Having in place appropriate controls for inward and outward communications ”“ such as encrypted email.
- Letting your customers know the potential dangers and what you are doing to protect them.
Photo by Markus Spiske from Pexels
Drivers for Growth? People, Technology and Regulations- a collaborative approach
Driven by digitalisation, fintech is one of the most important innovations embedded in everyday transactions, supported by emerging technologies including automation, cloud computing, artificial intelligence, blockchain, smart contracts, and machine learning.
While fintechs are here to stay, the image of the future is a little uncertain. Challenges such as the modernisation of financial architecture and changing consumer perceptions, the disruption of existing service models, incumbent employers and regulatory frameworks posing double edge implications for the overall ecosystem, and to access human capital, a discussion initiated by the University of Dundee Business School inviting FinTechs, regulators and Academics.
Regulators’ concerns have become increasingly complex because of technological integration and at times, fintechs exist in an environment with limited guidance. This challenge is underscored by regulatory regimes that multiply across countries, states, and even regions, a point emphasised by Professor Hisham, Birmingham University Business School, added how the terms around fintechs are not”¯comprehensive or standardised, which needs to be addressed in order to enable the”¯ecosystem to”¯grow.
Quicker responses from financial markets are crucial in terms of developing new instruments to battle the challenges about security and reliability of data and in terms of developing the regulatory framework, fostering relational and behavioral trust with consumers.
We must understand that regulations can be a barrier too, another point emphasised by industry experts, emphasising the need for a more balanced approach that allows flexibility and innovations. Najia ( Securities Exchange Commission of Pakistan) shared a regulatory perspective by adding that attitudes are shifting as a result of regulatory sandbox initiatives, providing a safe environment for early-stage development for fintech start-ups to test their innovations without the need for full license, thereby, playing another critical role in the development of fintech, ultimately breaking down the current regionalism of the sectors.
Nonetheless, different countries are at different stages of fintechs growth, for developing countries like Pakistan, a bigger issue is contract enforceability, suggesting that the biggest challenges are from the other side of the table, hence being mindful of the fact of how”¯the investors are and can be protected. This signifies the emergence of new developments and technological innovations that can help to develop a global friendly fintech ecosystem, breaking down the current regionalism of the sector.
“”¦.Fintech innovations will only become more pervasive in everyday transactions as their adoption increases and more inclusive and open regulatory frameworks allow them to grow.” [Stephen Ingledew, CEO at FinTech Scotland]
Opportunities abound for fintechs to engage in dialogue with regulators and raise awareness of rapidly emerging technologies and consequences they may have for market integrity, stability, and sustainability. Knowledge shared between regulators and fintech companies can enhance regulators’ awareness of consumer habits, behaviours and desires.
The technology supports the human understanding, where the growth opportunities are, but it will never replace a human in making those decisions, a point emphasised by Clive representing ACCA and Morris, Dean of Dundee Business School, adding that Digital transformation requires a transformation of people, technology, and processes, with people being the most important factor.
The key challenge organisations are facing globally, is the right talent. Despite searching for it, businesses are not getting the right people to assist them in this particular transformation. You can’t really have one without the other, Marijus (NCR) and James (Zudu), Tayseer (SadaPay) and Hazel (Candocollective) continuing the debate, suggested that people are extremely important, especially development of human capital, we need to put more emphasis on people’s learning, not only in their own skill set and knowledge, and also for their cross-functional flexibility.
After all, everything connects and technology, human capital, and businesses are dependent on each other now maybe more than ever before. The importance of educators was emphasised by most participants in reducing the gap between the needs of FinTechs and the offer of the current human capital market.
Overall, the promises offered by fintech certainly far outweigh the risks, at least in the medium to long term! However, we need to act now and get the regulatory environment and the human capital market “fintech ready”.
Participant organisations:
University of Dundee Business School ; SadaPay; Sehatkahani; Fintechscotland; Securities Exchange Commission of Pakistan; Candocollective; Birmingham University Business School; Zudu; NCR; ACCA; Tez Financial Services
FCA’s Innovate’s Sandbox open for applications
Photo by Prateek Katyal from Pexels
The FCA’s Innovate’s Sandbox is currently open for applications until the 31st of December 2019!
As well as looking for applications from innovative businesses wanting to make positive changes in the financial services sector, this year the FCA has highlighted areas where it would like to see innovation. It’s particularly interested in receiving applications from firms with propositions that:
- make finance work for everyone ”“ by addressing issues around access, exclusion and vulnerability
- support the UK in the move to a greener economy ”“ by responding to the challenges posed by climate change
- use technology to overcome regulatory challenges ”“ by helping regulated firms comply with their obligations
It’s also highlighted 2 specific technology areas where the FCA would like to see more innovation and testing and applications are welcome from:
- federated learning and travelling algorithms
- complex scenario modelling and simulation
For more information on the process, eligibility criteria and lessons from previous Sandbox cohorts please use this link.
It would be great to see more applications coming from the vibrant innovative community in Scotland. Please get in touch if you’d like more information.
Good Luck!
FCA news – Tips to keep up to date with the regulator
I always pause for thought as I write an update on what’s happening at the FCA, thinking about how to summarise the essence of what I’ll cover and knowing I’m only focusing on a small sample of what’s going on there.
For those of you able to make it to last week’s FCA event you’ll have heard the team talk about the size of the FCA’s role and remit. Since coming back to work after the Christmas break I’ve found myself thinking about what to cover in my regular blogs, when there could be so much to highlight. So its with that thought in mind that I’m focusing the majority of my update on a couple of ways to keep up to date with what’s going on at the FCA and ending with a specific point relating to a consultation paper on cryptoassests.
Getting updates from the FCA
There are two communications that I’ve always found helpful and even more so since staring my role at FinTech Scotland.
The first is simply a weekly email that contains a summary of that weeks FCA news. Its a great way of seeing what the Regulator has published that week. It’s no more than one page (usually) and will include links to any consultation papers, policy papers, final notices, speeches etc. Its worth signing up for – try this link.
The second is the Regulation Round Up. Its published on a monthly basis, includes information that is relevant for all firms regardless of sector, size or business model. The January Edition can be accessed here and for those interested you can also sign up to receive the Regulation Round each month – regardless of whether or not you’re involved in an authorised or regulated business. Again – my view is – its worth signing up for!
As well as covering hot topics, the Regulation Round Up provides updates on ongoing FCA work, will often contain articles outlining the FCA’s view on an topic and will include relevant links to current consultations and other FCA papers that may be relevant to your business or future plans. It will also outline any FCA events that maybe relevant or useful for your business.
The January edition highlights that the FCA intends to carry out a survey of smaller firms on how FCA regulation specifically impacts them. This work will be completed by an independent consultancy – Kantar Public. If you’re contacted please support this initiative. Your feedback will be highly valuable.
It also mentions that the FCA will be holding two events in Edinburgh in March aimed at regulated firms working in general insurance or the retail investment market. You’ll find more detail through the January Edition link above as well as information on how to register for the events.
There is much more information in the round up and the final point I’ll reflect on here is that in this months edition it also covers the important topic of Preparing for Brexit!
Getting insight from the FCA
To help focus its work, the FCA has divided the financial system into seven sectors that it monitors on a continual basis. It develops a set of sector views that provide a way to bring its collective intelligence together and considers a wide range of factors that drive change across the financial system.
The sector views are published and made available on the FCA website and will also be used as the FCA shapes and develops its business plan – due later this year.
The latest set of sector views were published in January and can be accessed here
Consultation paper – Guidance on Cryptoassets
The FCA is consulting on Guidance on crypto assets. This work is to help businesses understand whether their crypto asset activities fall under regulation.
This consultation has the potential to apply to a wide range of businesses. If crypto assets is currently or may potentially to be part of your business in the future, or if you’re engaging or talking to consumers on this topic or marketing this type of product, please review this consultation and offer your feedback. Comments are required by Friday 5th of April and can be emailed to fcacrypto@fca.org.uk
As I sign out for now, a final reminder that the FCA’s project Innovate team is hosting an event in Edinburgh on the 31st of January. I look forward to seeing you there. Please come and say hello especially if we’ve not met yet.
All the best
Nicola