Jan 16, 2016
Welcome to Barefoot innovation as we start into a fresh
new year.
Being appreciated!
We are kicking off 2016 with a wonderful
guest, Nitish Pandey of BMO,
and also with exciting momentum for Barefoot Innovation. In
December, we were named one of the top 9
fintech podcasts by FintechNews Switzerland. We
are delighted to be counted among the best in the world, including
the Breaking Banks show of my friend
Brett King. (If you’re enjoying Barefoot
Innovation, please do consider donating to our efforts to produce
it using the button below!)
Innovation Nation – fintech in the
UK
That recognition of our series was especially timely, because
I was in London at the time to participate in a roundtable of the
U.K.’s Financial Conduct Authority on the topic of today’s podcast.
The FCA has taken the lead globally in proposing creation of a
“regulatory
sandbox” – a safe space in which financial
innovators can experiment with ideas that might benefit consumers,
but that could hit trip wires or raise concerns under today’s
rules.
Americans should focus on this: the U.K. has adopted a
national strategy, from its top leaders on down, of becoming the
fintech capital of the world. One facet of that strategy is
the FCA’s launch ofProject Innovate, which has goals like
this one: “We promote competition through disruptive
innovation − innovation that offers new services to customers and
challenges existing business models.” Consider that language
– the regulator is explicitly “promoting…disruptive
innovation.”
The FCA’s efforts include creating an
Innovation HUB that provides support for promising
innovation, and a methodical review of how regulation
impacts innovation. Last year they formally requested public input
on two crucial questions: what regulations are impeding beneficial
innovation, and is there a need for new regulations to foster
innovation? While digesting the resulting comments, they put out
their proposal on the sandbox concept. They’ve been sharing these
ideas globally and exploring very creative approaches, like whether
it would make sense to create a “virtual sandbox” in which
innovators could test certain ideas through shared data, without
exposing real consumers to any risk at all.
Lawrence Wintermeyer of Innovate Finance, speaking at the
FCA’s December sandbox roundtable, cited growing excitement around
both “fintech” and “regtech.” He argued that London has the “tech”
of the U.S. west coast, the “fin” of New York, and the “reg” of
Washington – all clustered in one city where everyone can get
together by public transport in fifteen minutes. The U.K. has other
innovation advantages over the U.S., including a more concentrated
banking system and a much simpler regulatory structure.
Startups are also attracted by the ability to “passport” UK
activities throughout the European Union, offering easy access to
large markets. All this contrasts sharply with the U.S. model in
which innovators seeking national scale must undertake the complex
process of securing either a bank charter or 50 state licenses, or
both. Still, part of London’s innovation success clearly stems from
deciding to value the upside promise of innovation, in addition to
policing the very real downside risk. The FCA’s efforts include a
conscious effort to be nimble – something that does not come easily
to any regulatory system. The resulting vibrancy is
palpable.
On this side of the Atlantic
In the U.S., the same thinking is gaining traction.
Comptroller of the Currency Tom Curry has appointed anew task
force for Responsible Innovation, as we discussed in
our recent episode with him. The CFPB has its Project
Catalyst innovation lab, and the Federal Reserve
Bank of San Francisco held a conference last fall on the
“(R)evolution Underway” in financial services, addressing “how
technological changes are presenting opportunities and challenges
for financial institutions while compelling regulatory agencies to
think about how innovation impacts the supervisory
process.”
These U.S. discussions increasingly include exploration of
creating a regulatory sandbox – which brings me to our guest for
this episode.
Nitish Pandey is Senior Vice-President &
Chief Legal Officer, U.S. Personal & Commercial Banking, for BMO
Financial Group of BMO Harris. He believes our financial ecosystem
needs a safe sandbox in which to innovate (as did Jesse McWaters
and Rob Galaski in our episode on the
“Secrets of Fintech”).
Nitish and I started discussing the sandbox
concept last summer (before the U.K.’s proposal). I’d convened a
roundtable on disruption of consumer finance and how to (and not
to) regulate it. Nitish, whom I’ve
known for years, came to the meeting armed with the most specific
blueprint I had seen on these ideas. In the months since then, he’s
refined it and shared it publically several times.
The goal of a sandbox approach is to allow testing of
pro-consumer innovation, while assuring that customers are still
well-protected. The issue has endless subtopics. For
instance, is a sandbox really needed? How do current rules impede
innovation -- if they do – and which ones are most problematic? Is
it appropriate to use the concept of “risk tolerance” in consumer
protection? If so, can risks be defined? Can they be
quantified and measured?
And, if a sandbox would help, how should it be designed? Do
regulators have the legal power to waive or suspend rules to allow
experimentation and if not, should they? What standards should
innovators have to meet? How would experiments be time-limited?
What standards should be used to permit them, and to judge their
success? If new ideas prove out, should they be publicized? Should
the whole market be allowed to adopt them? If so, would this
require extensive rewriting of current rules? Will innovators have
sufficient incentive to enter the sandbox, if competitors can
simply adopt the ideas they pilot (in contrast to, say, government
approval of new drugs after testing that ultimately produce
patents)? How can innovators protect their confidential
intellectual property? Would agency pre-review of sandbox
proposals bog innovation down in bureaucracy, defeating the purpose
of the whole exercise?
And perhaps most importantly, how should consumers in a
sandbox be protected? What limits should be placed on potential
harm to them? Should they be compensated for any harm and if so,
how? What disclosures should they receive? Should they have to give
consent? How would harm be quantified?
While Nitish doesn’t try to
answer all of these questions, he tackles many of the hardest ones.
And he pinpoints a core issue that’s widely underestimated. The
problem is not just rigid and potentially counterproductive
regulatory requirements. It’s also the sheer cost and effort of
implementing full-scope compliance for virtually any change.
If businesses can’t inexpensively test how customers would respond
to an innovation, they won’t offer it. And they can’t test
real-life response to new ideas today, without also building out
massive compliance machinery
– Nitish calls it the “pipes” –
affecting nearly every function of the company. We’re in a
“Lean
Startup” world today where innovators grow by
designing and refining a minimum viable product (MVP) through
quick, intensive consumer interaction. Traditional companies can’t
do this well, partly because their compliance systems weigh them
down.
Nitish has ideas how to design and execute
a practical solution for this – without going
bureaucrazy!
Compliance as innovator?
While I had Nitish with me, I
also took the chance to have him share his advice on the revolution
underway in the compliance function. He is the first bank
compliance manager we’ve had as a guest, and a visionary in the
field.
He believes, as I do, that consumer financial protection is
migrating from a rules-based system to an increasingly
principles-based one. That shift is bringing permanent uncertainty
which, in turn, requires deeply remaking the compliance management
model. “It used to be, if you knew your regulations, you were
fine,” he says in our discussion, whereas today’s compliance
manager is a “true risk management professional who can be creative
in the process and demonstrate excellent judgment as we rapidly
move into an increasingly gray world.” He lays out the new role of
compliance in today’s bank, why it’s needed, the key changes
required, and how to make it happen.
Nitish’s insight derives partly from his broad
background. He has undergraduate and postgraduate qualifications in
Law, Economics and Management in his native Australia and has held
positions ranging from marketing to nearly every facet of risk
management. He spent a decade at American Express in Compliance,
Risk Management and Operations, focusing on consumer, small
business and commercial portfolios. He was Deputy Chief Compliance
Officer for American Express Centurion Bank, responsible for the
oversight and implementation of the bank’s Compliance Program. In
November 2014 he joined BMO as Chief Compliance Officer (CCO) for
U.S. Personal and Commercial Banking.
I hope you enjoy my talk with him as much as I
did!
More Links:
If you enjoy our work to bring together thought provoking ideas and people please consider a contribution to support the site.
DonatePlease subscribe to the podcast by opening your favorite podcast app and searching for "Jo Ann Barefoot", or in iTunes.