Speaker: Jessica Rusu, Chief Data, Information and Intelligence Officer
Event: FCA 10th anniversary event
Delivered: 17 October 2024
Highlights
- We’re launching an AI Lab. The AI Lab adds a new AI-specific focus to our Innovation services.
- 10 years ago, we became the first financial regulator in the world to launch a regulatory sandbox. We are celebrating our impact as well as the UK’s leading global position in FinTech and innovation in financial services.
- Since then, we have supported almost 1,000 firms and over 95 other regulators have introduced a sandbox model.
I’d like to take a minute to take you back to 10 years ago. The Lego Movie was one of the biggest movies of the year, streaming data was included in the singles charts for the first time, and no one could escape clapping their hands to Pharell Williams and 'Happy'.
And in the UK, the FinTech market was still in its infancy, estimated to be worth around £5-6 billion, with less than 1000 firms active. In August 2014, then Chancellor of the Exchequer, George Osborne, announced the UK Government’s ambition to make the UK the 'global capital of FinTech'.
Meanwhile, Project Innovate was made up of 2 people based in our previous Canary Wharf offices. The landscape of UK financial services and FinTech were drastically different. So, what’s changed?
As of 2023, the UK FinTech market has exploded, reaching a value of around £30 billion. Furthermore, we’ve seen the number of FinTechs in the UK more than treble to over 3000 today.
In 2023, while the US saw FinTech deals worth over $24 billion take place, the UK did come in second place with over $5 billion. Last year, capital secured by the UK was greater than the next 28 European countries combined - something to really celebrate. I believe that our support for sustainable growth and innovation has contributed to that success.
And what about that support? Since 2014, Project Innovate has grown and evolved. No longer driving the innovation agenda alone, it now sits in its own department in an expanded division, with data, digital intelligence, product development and technology.
The Data, Technology and Innovation (DTI) division, which I’ve led since 2021, is responsible for supporting innovation not only in industry but also for delivering regulatory solutions to help the FCA deliver against its ambitions, leveraging the power of data and technology. Innovation is now over 30 colleagues, with many more right across the FCA supporting technology and innovation.
Our Innovation services now has an expanded offering, including our world-first Regulatory Sandbox which has been replicated by over 95 global and domestic regulators. Our Innovation Pathways services have helped guide firms through the complexities of regulation and our processes.
Over the past 10 years we’ve supported almost 1000 firms serving UK consumers. Through our TechSprints, we used our convening power to bring communities and expert collaborators together to find solutions to the biggest challenges in financial services using technology and innovation, such as Authorised Push Payment (APP) fraud and tackling money laundering.
PolicySprints soon followed. Through discussion and exploration by bringing experts together, this novel approach assists in informing our thinking on various topics, from Crypto to Open Finance, allowing for more dynamic policy considerations and creation, and informing potential future regulation.
We have recognised that innovation and emerging technologies know no borders. They are global in nature, requiring an international approach. For this reason, we created the Global Financial Innovation Network (GFIN) in 2019, and since then we have continued to invest in growing this global community to now more than 90 regulators. Global markets mean that global events have an impact on the UK financial market, impacting volatility and bringing about potentially stormy waters.
Through that time, we’ve tasked ourselves with a critical responsibility - to help steer the ship through both calm and rougher seas. Whether that be helping firms navigate the choppy waters of product development, or the sunshine and fair winds of investment booms.
We endeavour to ensure beneficial innovation can flourish while maintaining our commitment to safeguarding consumers and the stability of the financial system. We’re creating the right environment for firms to flourish and grow, and for the UK to remain a great place to be an innovator.
Partnership
One of the key factors in our success over the past decade has been the strong partnership between industry and regulator. As many of you know, the role of a regulator is often misunderstood.
Some see us as gatekeepers, others as enforcers. A wall, or teachers with red pens. And, in truth, we are at times all of those things. But our role is more nuanced, more holistic. Especially with innovation.
It’s about creating an environment for sustainable growth, fostering competition, and ensuring that consumers get the best outcomes, and markets benefit from advancements in the long term. Here, we are not barriers to progress. We aren’t a wall, we’re a bridge. Partners in helping shape and support beneficial innovation.
Innovation plays a vital role in growth and competitiveness of UK financial services. Another thing that’s changed in the last 10 years is the addition of our secondary international competitiveness and growth objective. Our Innovation services play a key role in helping us realise our vision for the future.
Our commitment to innovation isn’t just rhetoric. We’ve witnessed, and supported, huge growth in the financial sector. Firms have brought forward new solutions to old problems, sometimes through our TechSprints, our Sandboxes, or through our Innovation Pathways. Helping to improve financial inclusion, drive efficiency, and better serve customers.
Firms for example, like ZilchLink is external, a buy-now-pay-later service for retail customers. In 2019, Zilch launched their beta product, and were accepted into our Regulatory Sandbox, finalising testing and exiting it in 2020, becoming fully FCA authorised not long after.
Since then, Zilch has raised over £11m investment, reached 3 million customers, and become profitable on a per transaction basis. We have seen them go from strength to strength to become one of the most successful UK unicorns. The sandbox provided Zilch with the support and live environment to test their solutions in line with regulated activities in the consumer credit space.
We also supported FinexosLink is external, who are addressing financial inclusion and credit poverty issues through provision of enhanced risk detection tools to credit providers.
Through application of AI, behavioural analytics and real-time data, they aim to reduce risk, costs, and default rates, benefiting both lenders and borrowers. In our Digital Sandbox, Finexos were able to develop and test this next generation of credit risk analysis, using open banking to assess a timeline of borrower’s financial capabilities, with an analytics focus on affordability, probability, and suitability, to create a fairer financial landscape.
All this work is, in part, due to the collaborative efforts between regulators, incumbents, and new entrants, alike. Our innovation initiatives have been a resource and a launchpad, working hand in hand with firms to deliver the necessary steers for innovation and growth.
In fact, an independent studyLink is external found that FCA sandbox firms are 50% more likely to raise funding than their peers, and on average raise 15% more in investment.
Feedback from firms on their experiences with our Innovation Services also support our role as a facilitator. Many say they don’t think their company or product would have been able to scale up or mature in the same way if they hadn’t engaged with us, whether through our TechSprints or our sandboxes.
Even firms that didn’t make it through the application stage for our sandboxes tell us how helpful we were. Our last firm survey found that 50% of firms whose applications were unsuccessful still rated our Innovation services as useful for their business development thanks to our engagement and signposting.
As part of our 10th anniversary celebrations, we are today publishing a Lookback Report, which includes detail on the depth and breadth of our services and support we’ve provided to firms across the financial services landscape over the past decade.
Future of AI in financial services
Whilst we should look back over the last 10 years, and celebrate our successes, we are actively working on the future. Our work is far from done, and if anything, the pace of innovation is only accelerating. New challenges and opportunities are emerging on the horizon.
One of the most transformative of these is AI. AI will revolutionise financial services, providing solutions to improve consumer financial inclusion, help prevent market abuse, and support the delivery of new products and services. And whilst we are just starting to see AI’s benefits emerge, we are clear that those benefits do not come without risks.
As a regulator, we must play a critical role in ensuring AI is deployed in a way that is safe, fair and in the best interests of consumers and the market as a whole. Even some of the world’s most profusive backers of AI recognise the importance of ensuring the risks of AI are mitigated, as we all work to realise the undoubtedly enormous benefits the technology has to offer.
That’s why AI is a priority for us. We are committed to enabling a safe and responsible environment for the beneficial use of AI in UK financial markets, in a way that supports the growth and competitiveness of the sector.
We are dedicated to working alongside industry leaders, academia, consumer groups, Government and fellow regulators to explore how AI can be safely and effectively integrated into financial services.
This includes our work with the Digital Regulation Cooperation Forum (DRCF), with whom we launched an AI & Digital Hub in April this year, for innovators looking for cross-sectoral guidance on AI solutions.
In our AI Update, published in April 2024, we reiterated our principles-based and outcomes-focused approach to AI, including how many of the associated risks can be mitigated within our existing outcomes-based regulatory frameworks, such as the Consumer Duty and Senior Managers & Certification Regime, while supporting beneficial innovation.
We’re taking an evidence-based approach to AI. We have previously conducted two Machine Learning surveys taking stock of the use of the use of the technology in the sector. As AI has continued to expand in use, we’re also expanding our research remit. The third edition of our AI Survey, alongside the Bank of England, which is due to be published soon, gives us further insights into how the technology has evolved, including usage of generative AI, and how it is currently being deployed in financial services.
We stand ready to support the next wave of technological innovation in financial services. And as AI continues to evolve, we want to ensure that the technology works for the benefit of everyone, not just a select few. The FCA will remain vigilant, proactive and committed to enhancing AI use without sacrificing the trust and security that underpin financial services.
To this end, we have listened to the challenges firms face around AI and continue to adapt to their needs and work towards removing blockers to innovation. One of these steps was making our Digital Sandbox permanent in August of last year, to facilitate firms testing of innovative proofs of concepts for products and services. Since launch, 53 AI-related applications have been made, accounting for almost half of all the applications made to the service. But that’s not all.
AI Lab
As part of our ongoing commitment to innovation, I am thrilled to announce the launch of a new initiative. Our AI Lab. This is the next step in our mission to help firms overcome challenges they face in building and implementing AI solutions, as well as supporting the Government’s work on safe and responsible AI development.
We are also exploring closer collaboration with the DRCF on this initiative, a natural evolution in our work together following our collaboration on the AI & Digital Hub. Our AI Lab will play a critical role by providing AI-related insights, discussions, and case studies, helping us deepen our understanding of potential AI risks and opportunities in a collaborative environment, where regulators and industry can engage candidly and openly.
The Lab will be made up of four components:
- AI Spotlight
- AI Sprint
- AI Input Zone
- Supercharged Sandbox and testing
AI Spotlight
The AI Spotlight will provide a space for firms and innovators to share real-world examples of how they are leveraging AI, and to share emerging AI solutions that will lead to industry growth. The AI Spotlight will be hosted on the Innovation Services FCA portal, offering a valuable repository of practical solutions that showcase applications of AI across specific themes. Those accepted will also take part in a Showcase Day at the FCA London office on 28 January 2025. Firms can apply to the AI Spotlight today.
AI Sprint
The AI Policy Sprint will bring together the brightest minds in industry, academia, regulation, technology and consumer representatives, to focus on how we enable the safe adoption of AI in financial services. We will host this inaugural AI Sprint in January 2025.
AI Input Zone
We look forward to inviting all stakeholders to have their say on the future of AI in UK financial services, including our regulatory approach, through an online feedback platform. We want to hear your views on the most transformative use cases, how our current framework works and how we may need to adapt in the future. The platform will open next month.
Supercharged Sandbox
Looking ahead, we’ll run AI-focused TechSprints and enhance our Digital Sandbox infrastructure through greater computing power, enriched datasets and increased AI testing capabilities.
We’ve heard directly from firms about the challenges they face, and we’ve adapted our approach to meet those needs. The AI Lab is a testament to our commitment to listening and responding to industry, while continuing to push for innovation that creates better outcomes for consumers and markets alike.
It’s a chance for us to work together to shape the future of AI in financial services, providing us with a practical understanding of AI usage, and helping to inform the FCA’s policy approach. Whether you represent a fintech, financial institution, academia, consumer interests or a technology provider, sign up today to receive details of these services. Find more information on our AI Lab page. These initiatives are built with your needs in mind, and we are eager to continue collaborating to ensure that the next wave of innovation is more impactful than the last.
Conclusion
That next wave of innovation, whether it be fund tokenisation, green finance, AI, quantum, or any other of the exciting innovations on our horizon, will be met with a financial services regulator ready to support the adoption of these innovations to support growth in our economy.
We’ve established FinTech and RegTech market analysis functions, alongside an Emerging Tech team looking at Horizon Scanning, ensuring that we have a telescope trained at whatever is coming next.
This applies to new technologies and priority areas, such as financial inclusion or market abuse, that affect both consumers and the markets we protect.
To our collaborators - the FinTechs, institutions, suppliers, technology firms, consumer groups, academics, government members, and innovators – thank you for your continued support.
Our services thrive because of your participation. Thanks to all the firms who applied to the Regulatory Sandbox, Innovation Pathways or the Digital Sandbox. Working with you has enriched our services immensely.
Your collaboration has been invaluable, and together, we’ve navigated uncharted waters over the last 10 years to help create a more innovative, inclusive and competitive financial ecosystem in the UK.
We are proud of what we’ve achieved together, and this is just the beginning. We remain committed to working alongside you, ready and waiting to tackle the challenges and seize the opportunities that the next decade will bring.
We’re excited to continue this journey as we plot a course for the future of innovation in financial services.
