Financial Conduct Authority, the Pacemaker of the UK FinTech Revolution
We arranged an interview with Maha El Dimachki, Head of Payments of the FCA during Singapore FinTech Festival, which El Dimachki shares with us the contribution of the FCA for UK as the thriving FinTech hub, opportunities and threats of e-money firms from the current digital disruption.
Established on Apr. 1 2013, the Financial Conduct Authority (FCA) regulates the conduct for 59,000 financial services firms and financial markets in the UK. Given that the UK financial service sector employs over 2.2 million people and contributes GBP 65.6 billion taxations in the UK economy, the FCA strives to ensure a fair, regulated payment market for customer protection and maintain the UK’s reputation as a major global financial hub.
Apart from regulating the financial service market, the FCA is also the pacemaker of FinTech in the UK. We arranged an interview with Maha El Dimachki, Head of Payments of the FCA during the Singapore FinTech Festival,which El Dimachki shares with us the contribution of the FCA for the UK as the thriving FinTech hub, opportunities and threats of e-money firms from the current digital disruption.
Could you please give us a brief summary of your background and how you first became interested in the potential of Financial Technology?
Payment is an area that has interested me for a long time, having spent quite a number of years in the front line, operational, strategy, governance and risk management roles in and around payments, domestic and global. You cannot talk about fintech without talking about payments. We see a lot of FinTechs operating in the payments space and bringing to market new ideas that in some cases, like e-money, are now part of the fabric of our society. These new propositions have the potential to make our lives safe, seamless and secure. It can also disrupt them, damage our finances and destroy our trust.
The FCA, through its innovative work, seeks to encourage innovation in the interest of consumers. The question is how can we help innovative firms operate in a regulatory context, getting their products to market faster? And crucially, how can we ensure that the ones who get there do this in a safe way with the consumer at the heart of their propositions?
We are now at the point where the things that used to be seen as a niche can be seen as a mass market. Serious, sophisticated technologies operating in the financial system for real public gain.
By harnessing new technologies and turning them to the public good, we’re able to do things that just weren’t possible before. We’ve heard of examples where eye-gazing technologies help people with cerebral palsy to operate a laptop, communicate and make decisions or the use of biometrics across multiple disciplines and sectors. It’s exciting to see fintech firms looking to find solutions to address society-wide concerns like financial inclusion, or supporting various sectors of society with niche and specific needs.
What do you think has driven the FinTech revolution in the UK to make it one of the world leaders in this field?
London has become a thriving fintech hub. There are over 1,600 fintech firms in the UK and this number is predicted to double by 2030.
This state of affairs depends on some important contributory factors like entrepreneurial talent, availability of capital, the availability of technology and a supportive regulatory environment.
For payment firms, the implementation of the second payment services directive (PSD2) and open banking have become key enablers to driving innovation. The FCA’s Innovate and Sandbox - and all the initiatives that go with it such as our TechSprints – have played their part in this. For example, we have seen a large number of propositions coming through the FCA sandbox using DLT and blockchain technologies to find innovative solutions in financial services, notably applied in cross border payments with the aim to make them faster and more secure.
Whilst the UK has enjoyed a strong position as a fintech hub, we should never take our fintech sector for granted - but if we understand what supports it and has led to it developing, we stand a better chance of nurturing it.
How can institutions of different sizes benefit from the challenges of digital disruption today?
We’re now far down the road of the fourth industrial revolution – one dominated and defined by transformative technology – and the pace of change is only going to get faster.
Digital disruption provides opportunities to small and new players, as well as incumbent firms. All firms with know-how can provide new services to customers or to other providers. They may also be able to cut costs and partner up to create more compelling offerings for customers. Meanwhile, digital disruption can also offer opportunities to simplify or reduce compliance-based costs using RegTech. The M&A activity among payments firms continues to be strong and more and more organizations are seeing the value of partnerships. All this brings value to consumers and contributes to economic growth.
Payments and E-money firms epitomize our point that this kind of innovation brings great opportunity, but potentially create even greater threats if not done right. They have the potential to make our lives safe, seamless and secure; but can also disrupt them, damage our finances and destroy our trust.
These are not notional risks. Many of the firms we supervise have business and operating models that are evolving and adapting in ways that traditional businesses can only dream of. But oversight and risk management within these firms need to keep up to ensure that the sector develops in a safe way and in the interest of consumers.
Could you please tell us about your position, responsibilities and some day to day activities that you are involved with at the FCA?
My team is responsible for supervising over 1,150 payment and e-money firms in the UK Payments Sector, as well as supporting our retail banking colleagues. Our firms span small start-up technology companies to the UK’s largest merchant acquirers with established global footprints.
The FCA has a strategic objective to ensure markets work well. To advance this, we have 3 operational objectives:
• To promote effective competition in the interest of consumers
• To secure an appropriate degree of protection for consumers
• To protect and enhance the integrity of the UK financial system
We always have these in mind when speaking directly with firms, and setting our supervisory priorities.
In payments, our work focuses on key priorities designed to ensure that consumers are adequately protected when using the services of non-bank payments and e-money firms and that firms are not vehicles for financial crime and money laundering.
One of the key customer protections in the regulation of payment and e-money firms is the need to segregate and safeguard customer funds from other firm money. If this is not done in a sound way, and the firm fails, consumers may lose their money. It is, therefore, an important priority that firms get this right.
It is in the commercial interest of firms that they don’t fail. Prudential management of firms is a key focus of the FCA. Monitoring firm’s compliance with its regulatory capital requirements, and ensuring they have sufficient controls in place to identify when they may be likely to face financial difficulty so management can take steps to address the harm, or safely close the business in an orderly fashion before it’s too late. We see a clear link between firms facing prudential stresses and the potential for wider regulatory and conduct failings within firms leading to consumer harm and damaging trust in the wider market.
Financial crime is an FCA wide priority - with implications for individual firms, consumers, wider market integrity, and the security of the UK. Firms must ensure that they have the right systems and controls in place to detect and prevent money laundering and financial crime activities.
There is no typical day in the life of a payment supervisor. On any given day, the team may be reviewing intelligence and speaking with law enforcement agencies to identify the potential harm to consumers, investigating issues with individuals and firms, conducting on-site visits, or monitoring remediation activities.
I am keen to ensure that we continue to understand the challenges and opportunities within the sector such that we develop our supervisory work with the ability to respond to an environment of rapid change.
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