FCA Innovate and the Green FinTech Challenge
- Nick Clark
Encouraging innovation in the interests of consumers
The FCA’s aim is to add public value by improving how financial markets operate, to benefit individuals, businesses and the UK economy. We have a single strategic objective – to ensure the relevant markets we regulate function well. We also have 3 operational objectives to advance this overarching strategic objective: To secure an appropriate degree of protection for consumers; To protect and enhance the integrity of the UK financial system; And to promote effective competition in the interests of consumers.
Innovation is a powerful driver of effective competition in the interests of consumers. It leads to some firms emerging to operate at scale as genuine competitors to incumbents, and some innovators being purchased by or partnering with large firms to deliver their propositions to mass market. Disruptive innovation comes from firms of all sizes, and it drives incumbents to compete harder to gain or retain customers.
We launched Innovate in 2014 as an area of the FCA with a specific remit to encourage innovation in the interests of consumers. We believe that the actions and words of a regulator can directly influence the level of innovation that is brought to market. We want to see innovation that has genuine potential to improve the lives of consumers come to market across all areas of financial services. The opportunity for consumers to be better served is clear; be this through products that are better suited to their needs, greater access, or lower prices.
Since launch, we have provided support to over 700 firms of varying shapes and sizes. We have a presence and active role in the FinTech ecosystem, we have held our own events and participated in others, and we have produced policy on innovation in financial services markets. Our leadership and collaboration on an international scale has contributed to a developing global approach to encouraging innovation in the interests of consumers, through pioneering regulator-to-regulator FinTech cooperation agreements, supporting experimentation through our TechSprint programme working with around 500 firms, over the course of 5 events, and launching the Global Financial Innovation Network (GFIN).
Challenging the market
The Tech Challenge is a new way for us to play a more active role in driving innovation in an area where we see clear benefit to UK consumers and markets. The pilot Green FinTech Challenge supports firms developing innovative solutions to assist in the UK’s transition to a greener economy.
This approach involves us taking a view on areas where financial services markets could benefit most from innovation, and actively encouraging the development of creative, market led solutions in that space. To date, we have been values and sector neutral in selecting the firms that we work with. Here, we see an opportunity to more effectively shine a light on issues where innovation has the potential to deliver maximum benefit to UK markets and consumers. This is not about social policy or political objectives; it is about better delivering our statutory objectives, and making effective use of innovation as a remedy tool available to the FCA to address harm occurring in the market.
The Green FinTech Challenge compliments the Innovate function’s existing service offering. Firms developing innovative propositions that are not within the scope of the Green Fintech Challenge can apply to Direct Support, the Advice Unit or the Regulatory Sandbox in the usual way.
Why go ‘green’?
Climate change is an important issue for the FCA. Over the next few decades, climate change will fundamentally transform our economies, how markets function, and consumers’ financial needs. For example, the challenges of measuring and disclosing information on risks related to climate change means that investment valuations may not adequately factor in climate-related risks. Further details about our approach to climate change can be found in our Climate Change and Green Finance Discussion Paper.
We want a financial services market that works well when responding to the challenges of climate change, as well as the potential opportunities. The Government’s Green Finance Strategy highlights the importance of green FinTech innovation in meeting its target of net zero carbon emissions by 2050. We also think Innovation can play a positive a role in the global climate agenda, so we are actively encouraging the development of creative, market led solutions in the green finance space. We have not seen many green finance firms within Innovate in the past and so we called on these firms to come and benefit from our bespoke Green cohort.
What have we learned so far?
9 firms were accepted as part of the Green FinTech Challenge. Our support has helped the firms understand the regulatory implications of their business models and accelerate their developments. It’s also helped us to understand the issues facing innovative firms in this area and to identify common barriers to innovation.
- Metrics and taxonomies: Firms find it challenging to measure their own environmental impact, with inconsistent metrics and unclear expectations of what is required. Some of the Green FinTech Challenge firms are developing technology to more accurately measure environmental impact. For example, Enian is developing a machine learning tool that uses live satellite data and draws on Enian’s data library of 100,000 commercial solar photovoltaics (PV) and wind power assets to predict investment returns for greenfield projects.
- Transparency and disclosures: Some of the Green Cohort firms felt that a lack of clarity in the requirements for funds to disclose how their asset allocation justifies the designation ‘Environmental, Social, Governance (‘ESG’) can lead to difficulty for investors (institutional and retail) making like for like comparisons. A few of the firms in the Green Cohort are developing models providing investors the opportunity to invest in ESG investments or renewable energy projects. For example, Barclays is developing an impact investing ecosystem platform which aims to connect accelerators, fund managers, institutional investors, investor networks, and wealth managers. Plenitude is an ethical robo-adviser which allows users to incorporate their values into their investments plan. Neural Alpha is developing a software platform for matching investors’ sustainability preferences to investments. CoEnergy.app is a platform that automates the setup and management of share registry services for community renewable energy projects.
- Data and data quality: There is a lack of reliable ESG data in the green finance sector. Without better ESG data, analysis of firms or investments as to their environmental exposure or impact provides challenges to investors. This is exacerbated by the lack of consistent reporting standards and reporting requirements. There is a role for innovative technologies to improve the quality, quantity and accessibility of ESG data. For example, Sustainability.Exchange is building a platform for corporate ESG performance ratings and a blockchain-based prediction market, for ESG focused institutional investors.
- Improving consumer behaviours: Providing consumers with better information on environmental impacts empowers them to make more sustainable choices. One firm in the Green Cohort, Cogo, is an app that connects consumers with businesses that align with their social and environmental values. Energimine is a tokenised rewards platform which incentivises consumers to adopt greener lifestyle changes. I-Warranty is a mobile app that enables consumers to instantaneously capture receipts, register products and provide an easy to use, digital way to manage warranties and make claims. The app aims to reduce environmental impact by extending the lifespan of repairable goods and reducing e-waste and paper based warranties.
We believe the Challenge is a simple and effective way of bringing greater focus to an important issue, and helping firms innovate where there is potential for clear consumer benefit. The insights we gather through our work with the successful Green Cohort of firms will inform further work we do in this space, and will help us to deliver more broadly in our Mission to serve the public interest and add public value through our contribution to society.