Financial Regulation ”“ the opportunity for FinTech Research & Innovation

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:

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.

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