There are a number of existing trends that are going to dramatically affect the way the investment management industry operates in the future.
The financial crisis may have been tumultuous and fostered an onslaught of regulation in the sector but there are other factors at work that are likely to bring even more fundamental change.
Demographics, environmental issues, social values and technology will all play a part as developments in these areas drive evolution in the economy.
Regulation will need to change to keep up with these forces and technology is an area in which the FCA has identified opportunities to be proactive rather than reactive.
Project Innovate: Encouraging Innovation in Technology Trends
In June 2014 the FCA launched Project Innovate which is designed to help regulated firms with regulatory issues that arise from new technological developments. In a speech following the launch, FCA CEO, Martin Wheatley identified that the City of London has long been a hub for financial innovation but suggested that the pace, volume and origin of change is of a different order to what has gone before.
In making that observation he suggested that there were two competing visions about what this could mean for the future of financial services. Firstly it offers a new wave of possibility to rival that of the industrial revolution and the introduction of electricity. Secondly it could create a Wild West environment dominated by cybercrime, data losses, runaway algos, flash crashes and hash-crashes.
In Martin Wheatley’s view the challenge for regulators is to reduce the risks of the latter scenario while helping encourage the former by not damaging the opportunities it offers.
Balancing the Risks and the Benefits
Martin Wheatley noted the slowness of past regulators to support developments from the industry but he also pointed out that it required co-operation on both sides.
He indicated a desire to ensure that genuine pro-consumer developments such as P2P, online investment, money transfer, wearable tech, big data and next gen data processing were properly supported by the regulatory environment. This would require close co-operation between industry and regulator to ensure they can be fast-tracked in the UK.
In order to do this a three pronged approach would be implemented including provision of compliance expertise to innovating firms, launching an incubator to support small firms awaiting authorisation and looking for areas where the system needs to adapt to technology.
Areas that he considered required a greater focus on the risk-reward balance included high frequency trading and peer to peer.
There is a clear drive by the FCA towards a pro-active approach to support technological development. This should be welcomed by existing financial firms and new entrants that are bringing innovation to the market place.
As ever, the reward must be balanced by the risks, particularly where there is a focus on the retail investor. In the meantime, all stakeholders must remain vigilant to the growing threat posed by cybercrime.