Turning technology against financial crime

Speaker: Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists
Location: Royal United Services Institute, London
Delivered: 23 October 2019
Note: this is the speech as drafted and may differ from the delivered version

Highlights:

  • Financial crime and the criminal activity it facilitates cause incalculable damage to society – our joint endeavour is to monitor entry, devise controls and erect barriers powerful enough to stop criminals from causing further harm.
  • New technologies give us unprecedented access to innovative products and services, and flexibility in how we use them. But they also give criminals sophisticated tools to bend the financial system to their own ends.
  • Used to the right ends, these technologies can be gamechangers in the fight against financial crime – both for industry and the regulator.

I don’t need to remind the people in this room that financial crime is big business. We cannot be sure exactly how much money is laundered through the UK, but our best estimate puts it in the range of hundreds of billions of pounds. It is also estimated that the serious organised crime that money laundering facilitates costs the UK £37bn every year, while the estimated annual cost of fraud in the UK stands at a staggering £190bn. But mere facts and figures alone don’t convey the incalculable damage these activities cause to our society. 

Fraud accounts for around one third of all crimes experienced by individuals. And in the last year we’ve seen a 17% increase in fraud offences, driven by an increase in bank and credit account fraud to 3.8 million offences. Whether inflicting punishing personal losses or threatening the ability of organisations to stay in business, the impact of these offences is devastating. There are, of course, already requirements in place that aim to combat fraud, money laundering and terrorist financing across the financial sector. These requirements focus on the need for effective systems and controls in firms to detect, disrupt and stop criminal activity. But the fast pace of technological change and ever-evolving nature of criminals means that these systems and controls do not always change as quickly as the threats themselves. 

Our joint endeavour is to monitor entry, devise controls and erect barriers powerful enough to stop criminals from causing further harm. The task is daunting. New technologies are exciting and innovative. They give us unprecedented access to new products and services and flexibility in how we use them. And they are popular. More than 5 million people chose to lead an almost cashless lifestyle this year according to UK Finance. But they also give criminals sophisticated tools to bend the financial system to their own ends – the anonymity granted by virtual currencies being one well-known example. And with debit cards now the most popular method of payment, the opportunities to exploit weaknesses in the system are evolving. And yet, these same technologies, when used to the right ends, could also be game changers in the fight against financial crime.

Lots of people talk about technology as an enabler of financial crime. But today I want to focus on how technology can be used to detect and disrupt financial crime, and ultimately the criminals who seek to exploit the system.

The challenge we face 

Let’s first take a moment to consider this issue in context. The UK’s financial sector facilitates about £90 trillion changing hands every year, amounting to tens of billions of transactions. And last year alone there were 39.3 billion payments made in the UK. A proportion of these transactions will relate to criminal activity. We don’t know much – and identifying which ones is an enormous challenge, one that is only getting harder as criminals, aided by technological innovation, develop ever more sophisticated schemes.

Firms do not always have the complete picture when searching for patterns amongst vast amounts of data. The 2,000 firms who were involved in our first annual Financial Crime Data Return told us is that they collectively spent over £650 million a year on dedicated people to combat fraud, laundering and other financial crimes. And that didn’t include the efforts of branch staff dealing with customers at counters, who are at the front line of the industry’s efforts to tackle fraudsters and money launderers. Those firms made over 360,000 Suspicious Activity Reports to the National Crime Agency in 2017, and identified nearly 120,000 Politically Exposed Persons. So we already know that, on the whole, most financial institutions are not complacent about the risk and we can still see this from the figures we continue to collect. 

Since we first carried out this survey, we have seen more firms wanting to participate, and we will be publishing our latest data next year. That in itself presents its own challenges in drawing out trends, but gaining a broader understanding of what is going on across the industry can only be a good thing. What the latest results already reveal is that the collective resourcing cost of the fight against financial crime among these firms now comes to over £1 billion each year. That in itself may not come as too much of a surprise, but among the larger survey group what we also see is that the numbers of Suspicious Activity Reports and identified Politically Exposed Persons have not grown in the same proportion. 

Spotting bad behaviour is not easy, particularly when it lurks within an ocean of legitimate activity

It is too early to pin-point definitively why that might be the case. But what we can say is that our data-led approach enables us to bring these sorts of questions to the surface in a way it hasn’t been possible to tackle before. And it also allows us to deploy our resources and efforts in a quicker and more targeted way, as emerging areas of harm are identified. What certainly remains the case is that spotting bad behaviour is not easy, particularly when it lurks within an ocean of legitimate activity. The so-called ‘needle in a haystack’ challenge.

The way firms approach this challenge varies. But what is clear is each and every firm who is part of a transaction chain has a responsibility here, for example checking who their client or customer is. For some it’s a mixture of machine and manual processes – technology is used to flag up risks but banks still rely on thousands of staff to manually review those flags. What we might call ‘checkers checking the checkers’. Some firms are automating existing processes through the use of compliance technology, helping them keep on top of volume and reduce false positives in transaction monitoring. Some are going even further. We are seeing an increasing number of firms applying intelligent technology to tackle financial crime – including AI, robotics, natural language processing and machine learning.

Continuous innovation is vital if we’re going to stop criminals in their tracks

Continuous innovation is vital if we’re going to stop criminals in their tracks. In particular, it is becoming increasingly apparent that disrupting financial crime in real time is a key frontier. This is certainly true of fraud – stopping it before it happens. AI and machine learning could really make the difference here. From AI-driven impersonation checks to verify whether photos in different ID documents match, to the use of machine learning to identify high risk customers who may warrant deeper background checks – AI and machine learning could be turned to real, practical uses in the fight against financial crime. Not to mention harnessing machine learning to detect fraudulent patterns in real time and with greater accuracy – making it possible to identify if that really was me buying coffee in Kings Cross yesterday or a fraudster. 

Now as a regulator, we are ‘technology neutral’ – I’m not going to tell you whether you need to automate all your systems or question why you aren’t using AI in every part of your business. But we all need to experiment with new technology, and together see how we can tackle criminals who want to exploit the financial system. We focus on outcomes – and if a new innovation can help reduce harm, we welcome it. We all have a public duty to explore all opportunities to combat crime. Together, we need to turn technology against criminals.

Our role as the regulator

Of course, it’s not only firms that play a key role here. Beyond setting rules, publishing guidance, supervising firms and sharing intelligence, regulators are also exploring innovative approaches to combatting financial crime. It is clear that this threat needs a collaborative response. That’s why we have set up the Sandbox to support firms and their efforts to innovate in RegTech.

In our latest cohort of our regulatory sandbox, we have seen a number of propositions looking at digital identity specifically. Using machine learning, businesses can verify the identities of their customers digitally – reducing the need for cashiers to check identity manually in branch. It is clear that we need to build our own networks to combat the criminal networks. That is why we have also run two successful TechSprints, which looked at how the fight against financial crime could be aided by better information sharing – whether that be through relatively mature technologies like distributed ledgers or more nascent concepts such as homomorphic encryption. In fact, the latest, which we held in July, focussed specifically on how ‘privacy enhancing technologies’ (PETs) can facilitate the sharing of intelligence between firms, regulators and international law enforcement agencies without compromising data protection requirements. 

The solutions it produced included:

  • the use of multi-party computation to drive real-time analysis of payments to combat authorised push payment fraud
  • federated learning technologies to share and identify financial crime typologies across multiple entities
  • using PETs to establish a ‘golden pool’ of data, supporting better identification of beneficial ownerships by eliminating discrepancies between public registers and firms’ own records
  • tougher encryption, enabling firms to make enquiries about higher risk customers to uncover discrepancies in their on-boarding and due diligence processes

Pursuing ideas such as these is crucial, because we know that the exchanging of information needs to be conducted on a global scale. And that is why promoting and supporting them is so important, and why we have published videos of all the TechSprint solutions on our website and will continue to track them through to proof-of-concept stage. It is true that not all of them may work, but that can’t be a reason not to look for the ones which will. And in the first half of next year, we will publish a report detailing the progress made since the TechSprint.

Financial crime and the perpetrators behind it do not respect borders – their operations are truly transnational. So, our response must be too. That’s why we set up GFIN, a global financial innovation network, dedicated to supporting innovation in the interests of consumers. Now comprising 38 nations, from Bahrain to Bermuda, GFIN provides a forum for regulators and firms to collaborate on common challenges and policy questions. After all, without a harmonised approach, our efforts will be hamstrung. This also includes collaboration at a domestic level. For example, we are closely involved in the Government’s Economic Crime Plan, which commits the FCA and others to considering how the payment system can help tackle economic crime.

The Economic Crime Plan also highlights the strong public/private ethos in this area. The Joint Money Laundering Taskforce (JIMLIT) continues to grow strongly, reflecting the shared commitment to tackling this threat. And we’ve seconded our own people to the UK’s National Economic Crime Centre, which plays a key role in improving the policing response to fraud and money laundering.

Our own innovation

As regulators, we have relied on traditional supervisory tools for many years. But the technological innovations that are being brought to bear on industry approaches to financial crime also have major implications for our own work. And we need to make the most of them. In the last 12 months, we took over 15,000 calls from consumers reporting on scams and fraud. And in this year alone, we’ve received over 1,000 calls from consumers relating to crypto scams. The number of unauthorised scam cases where we have called for ISPs and web hosts to act on our alerts is ever growing. Since 2016, we have raised 785 of these alerts. Our own website has a scam checker page and warning list where consumers can check for scams. So, as you can see, this is an issue we have to grab with both hands. And with these growing numbers of calls, we too are trialling new ways of automating how we handle large volumes of unstructured information.

In a recent example, we have applied natural language processing to process over 50,000 consumer complaints interviews – quickly categorising, sorting and structuring these data into action-able cases. Reflecting the opportunities of the fourth industrial revolution we’re living through, we, like industry, now need to think differently. We have established the Analytics Centre of Excellence, an internal initiative to drive the use of data science, machine learning and AI across the whole of the FCA .This function, staffed by experts in regulatory technology and data science, is embracing the potential of new technologies to identify and prevent harm, as well as to automate and simplify our processes to maximise effectiveness.

We are currently experimenting with new analytical techniques, including predictive analytics and web-scraping, to help us discover key trends and potential outliers more quickly. This will help us focus supervisory efforts on entities that have been identified as higher risk.

One example is the use of data to spot potential outliers. Take money laundering – we have reviewed 10,000 data points across 16 separate regulatory returns including our Financial Crime Data Return, which I mentioned earlier and is now in its third year – to produce analytics that can highlight risk profiles. From this we can be better informed about the potential for businesses to be more susceptible to money laundering risks. This means supervisory work is more dynamic, targeted and responsive to risk indicators. And we’re exploring the feasibility of using automated tools, as our more traditional methods of supervising systems and controls can benefit from new techniques. For example, we are looking at two proofs of concept to test where gaps may exist in systems and controls designed for sanctions spotting and transaction monitoring. These tools could help firms understand if sanctions data is up-to-date and whether their defences are able to pick up known money laundering typologies and patterns.

As a regulator we already make use of innovative tools in other spheres – in the cyber space we use CBEST, or in plainer terms, ethical hacking – to help us test the robustness of firms’ defences against cyber-criminals. Why not take this thinking into the financial crime space?

We are currently experimenting with new analytical techniques, including predictive analytics and web-scraping, to help us discover key trends and potential outliers more quickly. This will help us focus supervisory efforts on entities that have been identified as higher risk.

Over time, we hope this will allow us to deter misconduct by focusing on specific firms or portfolios based on interesting patterns and trends we observe in the data.

Conclusion

The pace of change the financial sector is experiencing can feel daunting. But as a regulator I feel encouraged by the industry’s commitment to work together to make the UK a secure place to do business. It’s easy to get lost in the detail. But let’s not forget that at the heart of the discussion around financial crime sit two vastly important issues – societal harm and economic prosperity.

The rise of technology threatens both when exploited to criminal ends. We can’t shy away from that and the FCA has high expectations of ourselves – and firms – to meet this challenge. Experimentation with new technologies will bring about new ideas and new ways of tackling the challenges. It might not succeed first time but our experiences will inform the next generation of experiments and ultimately deliver change.

Technology, frequently an enabler of crime, can also be a hugely potent tool in the fight against it

Technology, frequently an enabler of crime, can also be a hugely potent tool in the fight against it. Indeed, it may be the greatest tool we have, giving us the chance of finding that needle in the haystack. So, if I could leave industry with one message today it would be don’t be afraid to use technology and innovate to keep criminals out.
 

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FundingSecure Ltd enters administration | FCA

Funding Secure operates a P2P lending platform through a website (https://www.fundingsecure.com/) facilitating crowdfunded loans which are used to fund the purchase and development of property, as well as pawn-broking style loans secured on items of value.

The administrators’ function is generally to act in the interest of the company’s creditors as a whole, and this must be done as quickly and efficiently as is reasonably practicable. The administrators will contact all affected parties in due course. For more information about the administration please use the following contact details:

Who to contact if you are an investor

The administrators, CG Recovery Ltd, are now responsible for the business of Funding Secure Ltd. Among other things this means that they will seek to operate the P2P platform and credit investors with return of capital and interest as per the terms you have signed up to. Updates on how matters are progressing will be available on their website at (www.cg-recovery.com/fundingsecure).

What should investors do now?

The administrators will be contacting all investors in due course.

I have invested in an Innovative Finance ISA (IFISA) on FundingSecure’s platform – will the administration impact on the tax-free status?

The FCA is unable to comment on the tax status as this is a matter for HMRC. If customers have questions regarding tax on their investments they may wish to contact HMRC or seek independent financial advice. It is important to remember that IFISAs do not have Financial Services Compensation Scheme (FSCS) protection.

As a borrower, do I have to continue to repay my loan(s)?

Borrowers continue to be bound by the terms of the loan agreement facilitated by FundingSecure Ltd. If you have any questions please direct them to the administrators.

Do I need to use a third party to get my money back?

We are aware that some companies may approach customers of FundingSecure, offering to help them bring claims against the company. Be cautious if you are approached by one of these companies. For the vast majority of FundingSecure’s clients, there is no benefit in involving a third party in making a claim. Any customer who believes they have a complaint against the firm should contact the Administrator in the first instance.

Will investors be able to get compensation from the FSCS?

The activities of P2P firms are not covered by the FSCS.

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Rakuten Global Ventures, Inc. | FCA

Almost all firms and individuals offering, promoting or selling financial services or products in the UK have to be authorised by us.

However, some firms act without our authorisation and some knowingly run investment scams. 

This firm is not authorised by us and is targeting people in the UK. Based upon information we hold, we believe it is carrying on regulated activities which require authorisation.

Rakuten Global Ventures, Inc.

Address: 2-5-14 Shnyokohama, Kohoku-ku, Yokohama-shi, Kanagawa-ken, Yokohama, 222-0033, Japan

Telephone: +81 456 709 039

Fax: +81 453 306 695

Email: [email protected]

Website: www.rakutenglobalv.com

How to protect yourself

We strongly advise you to only deal with financial firms that are authorised by us, and check the Financial Services Register to ensure they are. It has information on firms and individuals that are, or have been, regulated by us.

If a firm does not appear on the Register but claims it does, contact our Consumer Helpline on 0800 111 6768.

There are more steps you should take to avoid scams and unauthorised firms.

If you use an unauthorised firm, you won’t have access to the Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS) so you’re unlikely to get your money back if things go wrong.

If you use an authorised firm, access to the Financial Ombudsman Service and FSCS protection will depend on the investment you are making and the service the firm is providing. If you would like further information about protection, the authorised firm should be able to help.

Report an unauthorised firm

If you think you have been approached by an unauthorised firm or contacted about a scam, you should contact our Consumer Helpline on 0800 111 6768. If you were offered, bought or sold shares, you can use our reporting form.

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Finamore Capital S.A. | FCA

Almost all firms and individuals offering, promoting or selling financial services or products in the UK have to be authorised by us.

However, some firms act without our authorisation and some knowingly run investment scams. 

This firm is not authorised by us and is targeting people in the UK. Based upon information we hold, we believe it is carrying on regulated activities which require authorisation.

Finamore Capital S.A.

Address: 117 route d’Arlon, L-8099 Luxembourg

Telephone: 020 3925 2350

Website: www.finamorecapital.com

How to protect yourself

We strongly advise you to only deal with financial firms that are authorised by us, and check the Financial Services Register to ensure they are. It has information on firms and individuals that are, or have been, regulated by us.

If a firm does not appear on the Register but claims it does, contact our Consumer Helpline on 0800 111 6768.

There are more steps you should take to avoid scams and unauthorised firms.

If you use an unauthorised firm, you won’t have access to the Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS) so you’re unlikely to get your money back if things go wrong.

If you use an authorised firm, access to the Financial Ombudsman Service and FSCS protection will depend on the investment you are making and the service the firm is providing. If you would like further information about protection, the authorised firm should be able to help.

Report an unauthorised firm

If you think you have been approached by an unauthorised firm or contacted about a scam, you should contact our Consumer Helpline on 0800 111 6768. If you were offered, bought or sold shares, you can use our reporting form.

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WFE Capital | FCA

Almost all firms and individuals offering, promoting or selling financial services or products in the UK have to be authorised by us.

However, some firms act without our authorisation and some knowingly run investment scams. 

This firm is not authorised by us and is targeting people in the UK. Based upon information we hold, we believe it is carrying on regulated activities which require authorisation.

WFE Capital

Address: Lee Garden Two, 28 Yun Ping Road, Causeway Bay, Hong Kong; 60 Gresham Street, London, EC2V 7BB, United Kingdom

Telephone: +852 3001 1424; +44 207 1005 700

Email: [email protected][email protected]

Website: www.wfecapital.com

How to protect yourself

We strongly advise you to only deal with financial firms that are authorised by us, and check the Financial Services Register to ensure they are. It has information on firms and individuals that are, or have been, regulated by us.

If a firm does not appear on the Register but claims it does, contact our Consumer Helpline on 0800 111 6768.

There are more steps you should take to avoid scams and unauthorised firms.

If you use an unauthorised firm, you won’t have access to the Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS) so you’re unlikely to get your money back if things go wrong.

If you use an authorised firm, access to the Financial Ombudsman Service and FSCS protection will depend on the investment you are making and the service the firm is providing. If you would like further information about protection, the authorised firm should be able to help.

Report an unauthorised firm

If you think you have been approached by an unauthorised firm or contacted about a scam, you should contact our Consumer Helpline on 0800 111 6768. If you were offered, bought or sold shares, you can use our reporting form.

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Villetorte Asset Management (clone of passported firm)

Almost all firms and individuals carrying out financial services activities in the UK have to be authorised or registered by us. This firm is not authorised or registered by us but has been targeting people in the UK, claiming to be an authorised firm.

This is what we call a ‘clone firm’; and fraudsters usually use this tactic when contacting people out of the blue, so you should be especially wary if you have been cold called. They may use the name of the genuine firm, the ‘firm reference number’ (FRN) we have given the authorised firm or other details.

You can find out more about this scam tactic and how to protect yourself from clone firms.

Clone firm details

Fraudsters are using or giving out the following details as part of their tactics to scam people in the UK:

Villetorte Asset Management (clone of passported firm)

Addresses: 30 Dukes Place, Aldgate, London, EC3A 7HX; Rue D’Arlon, 39-41 Bte 10, Brussels, B-1000, BELGIUM; 293 Cours De La Somme, Bordeaux, F-33800, FRANCE

Telephone: 020 3966 9912, 020 3966 9910, 020 3966 9911, 020 3966 9913, 020 3966 9914

Email: [email protected]

Website: www.villetorteam.com

Be aware that the scammers may give out other false details or mix these with some correct details of the registered firm.

EEA passported firm details

This FCA authorised firm that fraudsters are claiming to work for has no association with the ‘clone firm’. It is authorised to offer, promote or sell services or products in the UK and its correct details are:

Firm Name: Reyers, Beauvois de Villenfagne SA

Firm Reference Number: 206830

Address: Rue D’Arlon, 39-41 Bte 10, Brussels, B-1000, BELGIUM

How to protect yourself

We strongly advise you to only deal with financial firms that are authorised by us, and check the Financial Services Register to ensure they are. It has information on firms and individuals that are, or have been, regulated by us.

If a firm does not appear on the Register but claims it does, contact our Consumer Helpline on 0800 111 6768.

There are more steps you should take to avoid scams and unauthorised firms.

If you use an unauthorised firm, you won’t have access to the Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS) so you’re unlikely to get your money back if things go wrong.

If you use an authorised firm, access to the Financial Ombudsman Service and FSCS protection will depend on the investment you are making and the service the firm is providing. If you would like further information about protection, the authorised firm should be able to help.  

Report a clone firm

If you think you have been approached by an unauthorised or clone firm, or contacted about a scam, you should contact us. If you were offered, bought or sold shares, you can use our reporting form.

What to do if your firm is cloned

If you think your authorised firm has been cloned or scammers are fraudulently using your name or other details, contact our Firm Helpline on 0300 500 0597.

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Regulation in a changing world

Speaker: Christopher Woolard, Executive Director of Strategy and Competition
Location: City of London / Cicero event on Future of Regulation, London
Delivered on: 21 October 2019

Highlights:

  • The FCA asks itself if its regulatory model is still the right one, and if it’s ready to respond to the changes we see coming down the track.
  • The FCA will be issuing an open invitation for your thoughts and ideas on the future of its regulation.
  • In deciding on the future of regulation, the first step is agreeing the outcomes in the market to be achieved

Note: this is the speech as drafted and may differ from the delivered version.

What outcomes do we want?

The subject of my speech today is the ‘Future of regulation’ – which sounds very grand. The truth, though, is that this work is rooted in the small, routine actions that most of us undertake all the time.

The vast majority of us engage with financial services every day of our lives. And we have expectations when it comes to the outcomes we get from these transactions.

For most of us it comes down to the ability to pay for goods and services. An opportunity to borrow, especially for a major purchase like a house or a car.

To save for retirement. To insure against things going wrong.

It’s being able to understand the products and services we buy, knowing that they will deliver consistently against that understanding.

For businesses, it’s access to the capital that drives the real economy. And a wholesale market that functions well, providing for their needs, and those of other financial firms.

Ultimately, we want the financial system, and the firms and individuals within it, to be trustworthy.

We want the market to work well, to function as its customers expect. For both customers at home and for the UK as one of the world’s largest financial centres.

Globally we know this is a selling point for UK plc: a proportionate, predictable and well-designed regulatory system with high standards provides the basis for a competitive financial sector.

But the rules of the game have been shifting, especially in the 10 years since the financial crisis.

I don’t just mean the formal rules set at global, European and domestic level.

But also the unwritten rules – the expectations users of financial services have of the companies that serve them – and the wider context in which those interactions take place.

As the regulator of this vital industry, we need to not only respond to these changes – but also anticipate them.

To do that, we need to have an open discussion about the type of regulation that will best deliver for the public today and tomorrow.

This boils down to one simple question: what outcomes do we want from financial services?

Addressing this will require us to properly consider the environment we operate in, and to challenge some regulatory orthodoxies.

We may end up with a future that looks very different from the recent past.

But before we look forward, it is worth reminding ourselves how we got here.

The changing context

We live in turbulent times, and the context in which we work is characterised by change.

The shape that Brexit takes is clearly vitally important. Regardless of your perspective, and I should stress that the FCA takes no position on the substance of Brexit itself, leaving the European Union may provide us with an opportunity to do things differently.

But it is not the main consideration driving our thinking. Although it will shape the context in which we operate, there are other factors at play that in many respects are far bigger and mean we need to engage with this work now.

I’ll outline 3 in particular.

First, the first wave of post-crisis regulation is done. Firms are better capitalised and the personal responsibility of their leaders is more embedded. This is a good time to look at what has worked well, and what could be improved.

Secondly, there is a change in consumer need and attitude. Long-term low interest rates mean the search for return is stronger, just as the tolerance for loss lessens. Consumers are getting older, have less saved and inherit assets later in life.

And, lastly, innovation has gathered pace. We’re moving from an era of digitisation – services moving online – to a truly digital industry – one drawing on artificial intelligence (AI) and machine learning. This digital transformation is reflected in the new products finding their way direct to consumers over the internet (some good, some bad, some downright fraudulent).

The socio-economic, technological and regulatory change we’ve seen across financial services has, in many ways, brought great benefits.

The financial system is safer. Consumer credit is better controlled. And conduct, culture and customer outcomes are increasingly recognised and understood around Boardrooms.

But consumers also face new challenges.

Intergenerational change is placing new and different pressures on baby boomers, generation X and millennials. The ease of use of financial services presents a heightened risk of loss. And ordinary consumers are increasingly called upon to make more complex decisions about their finances, compared to a decade ago.

The pensions sector offers a clear example of this.

For many, saving for a pension used to simply mean joining a reputable employer and sitting back 40 years in a defined benefit scheme.

The financial system is safer. Consumer credit is better controlled. And conduct, culture and customer outcomes are increasingly recognised and understood around Boardrooms.

Today, though, most people rely on defined contribution schemes.

These pose questions about scheme strategy, fees and charges, defaults and lifestyling. All of which can make a huge difference to the final outcome a pensioner receives.

The Government’s ‘pension freedom’ reforms heralded a further change, sweeping aside the need to buy an annuity.

Consumers are faced with a further array of choices – whether to take tax free cash, have a drawdown plan, take the cash in full, or in part. To retire early, or keep working and stay invested.

And these decisions are overlaid with a series of complex tax policies.

In this context, advice and guidance become extremely important. But delivering this means reconciling a complex array of positions.

Consumers tell us they want help in making these decisions. But many don’t want, or are unable, to pay large sums for advice.

Most advisers tell us they’re not interested in handling small pots of money and many firms, while happy to sell products, don’t want the liability from advice when they get it wrong.

While regulators don’t want to allow crooks into the guidance space or let firms give advice by the back door.

We end up in a stand-off where no one is happy.

Is it any surprise, then, that although regulators, politicians and firms agree that consumers should make informed decisions about their finances in retirement, most end up focusing on their 25% tax free cash, neglecting to make a plan for the remaining 75%?

The truth is that the fundamental way in which the bulk of the population interacts with financial services is changing.

As consumers take more responsibility for their financial lives, their demands on the financial sector – and the bodies that regulate it – change.

Orthodoxies must change in response.

In particular, I’d argue we need to think about simplification for consumers, not adding layers of rules or advice in some kind of cat and mouse game.

While some of these issues are not new, the way they are now coming together is. And it’s time to think about what future we want to forge for ourselves.

How did we get here?

A diagnosis of why we are at this intersection could fill 3 or 4 speeches.

Some would say there has been an over-reliance on neo-classical economic theory. Not enough behavioural economics. Competitive pressure prioritised over consumer protection.

Others point to the failure of light touch regulation a decade ago. Or blame the volume of regulation and the way it’s overloaded firms.

The answer, some believe, lies in a Duty of Care. Some see detailed rules as the only way to harmonise a global system. Others argue rules are too prescriptive.

And in the background, the debate around how to get the best from innovation, whilst also guarding against new risks, rages on.

As consumers take more responsibility for their financial lives, their demands on the financial sector – and the bodies that regulate it – change. Orthodoxies must change in response.

The reality is that we have a lot of actors on the stage – industry and regulatory alike – with differing statutory or commercial goals, many of which may be legitimate, but possibly unsynchronised.

The question of retail investments offers an elegant example here.

If consumers only invested via a bank deposit account within the Financial Services Compensation Scheme (FSCS) limit, we could guarantee protection against any exposure to loss. But that would almost certainly not be the right answer for their pension savings, or for more sophisticated investors with the means to bear risk.

And when risk and return are higher, consumers can and will lose money – this does not necessarily imply any sort of failure from industry or regulator.

The problem is that consumers now have the option to invest in high risk, high return products, even if they don’t have a sophisticated understanding of those risks.

The future of regulation

So how do we strike the right balance between these competing pressures?

There’s no easy solution. But we do know what the components of an answer might be.

The first thing we have to acknowledge is that we live in a very different world to the one in which our rules were framed.

We have to ask ourselves if our regulatory model is still the right one, and if it’s ready to respond to the changes we see coming down the track.

We can’t answer these questions alone. It’s vital that our approach has the confidence and consent of our stakeholders and the wider public.

So over the coming months we will be engaging in a public conversation.

We will be issuing an open invitation for your thoughts and ideas, as well as setting out some of our own. And we’ll publish detailed papers, including an analysis of future market dynamics, a Discussion Paper about our Principles, and a Consultation Paper on the Duty of Care.

Rightly, we don’t know exactly where this conversation will take us.

But one thing is already clear – we are moving from a narrower compliance with the rules, to a focus on delivering the outcomes we want for the users of financial services.

This means doing things differently.

What does this look like in practice? I believe there are a few key factors.

The first step is to clearly state what outcomes we want to see in markets.

This is a complicated question, and one which may require us to face up to some hard truths.

Most of us don’t want to think too much about the products we buy or services we use. But we know if we don’t shop around we may get a worse deal.

Firms’ pursuit of profit is a healthy part of the market. But we don’t expect them to take advantage of loyal customers through excessive charging, or base their entire business models on behavioural biases.

Firms have a responsibility towards to their customers. But we don’t operate a ‘zero-failure’ regime. And consumers need to know that risk comes with return; in particular purchasing products outside of the regulatory boundary means you’re more likely to lose out.

We will be issuing an open invitation for your thoughts and ideas, as well as setting out some of our own. And we’ll publish detailed papers, including an analysis of future market dynamics, a Discussion Paper about our Principles, and a Consultation Paper on the Duty of Care.

This thinking also applies to wholesale markets: how should the market best function to serve its clients?

Deciding which outcomes we want to see will provoke debate. But it’s a necessary conversation, and the answer we reach will drive our approach.

It’s also a critical part of being accountable – being explicit about the outcomes we’re aiming for will help the public judge if we’re being effective.

This transition has already begun, and you can expect our Sector Views and Business Plan next year to be much more outcomes-focused.

The second step is to use everything available in the regulatory toolkit Parliament has given us.

In recent years, we have used our tools and powers more creatively in things like the Senior Managers Regime, Project Innovate and price caps.

Nonetheless, we must face up to the fact that disclosure has been the go-to solution of regulators and politicians in the UK and Europe for the last 20 years, making up the bulk of our requirements. But behavioural economics suggests its impact is limited.

We also have to think about cost effectiveness when it comes to delivering outcomes.

For one, regulatory cost is typically passed to consumers through higher prices. A ‘lighter’ solution like disclosure may have some positive impact, but may not solve the root of the problem. Where problems persist, we will ultimately have to return with a more interventionist solution.

In the meantime, consumers may still be harmed, and public confidence eroded. Firms will have invested in better disclosure, only for us to go further later. Far better, cheaper and more effective to go for the ‘tougher’ remedy sooner.

The demand from the public is clear – they don’t care if a set of rules has been followed, they care about the outcome they receive.

We’re already putting this thinking into practice – for example, on the problem I mentioned earlier: pension decumulation.

Following the pension reforms, drawdown increased in popularity. But the proportion of drawdown bought without advice jumped from 5% to 30%.

Most people were drawn to the asset they most readily understood and trusted: cash. But in the end, that means lower income in retirement.

We’d tried to head this off. We’d introduced entirely sensible, logical measures to help consumers make the right decision.

And yet, despite the warnings and free guidance, 100,000 people every year were drawing down without getting advice. Many were ending up in investments that would not meet their needs.

So we have gone for something far more radical.

Now firms will need to offer non-advised customers a range of investment solutions that broadly meet their objectives, otherwise known as ‘investment pathways’. Pension investments can no longer be defaulted into cash savings, unless the customer actively choses this option.

The key is building interventions around real consumer behaviour.

Our payment protection insurance (PPI) adverts featuring Arnold Schwarzenegger’s animatronic head were loud – some would say weird – but they did the job of grabbing the public’s attention and driving visits to our website to think about their options. So we knew they were working.

The third step concerns working with other agencies. As a consumer, you don’t care whether the problem lies with legislation, regulation, or industry practices – you simply want them all to work in your interests.

So we are increasingly working with Government, fellow regulators like the Information Commissioner’s Office (ICO), and enforcement agencies to think about the right outcomes, rather than each body delivering narrow solutions in respect of their mandates.

This does not mean a light-touch approach, nor does it imply that market participants will have a free hand. Rules remain important. But hopefully clearer and easier to understand.

In June, we published the first FCA Perimeter Report. As well as detailing where our powers start and end, it sets out how we’re working with others, across the regulatory boundary, to achieve good solutions for consumers.

One example of this is the Government’s pensions cold calling ban, which came into force this January. The ban prohibits all cold-calling in relation to pensions, except in specific cases, such as the recipient of the call having consented to calls.

The ICO is the enforcement body of the ban, but we work closely with them where breaches of the rules by FCA-authorised firms are identified.

And more broadly we want to make sure our work with other agencies is well coordinated and we are responding to the themes coming through the Treasury’s Call for Evidence on regulatory coordination.

The fourth step is to look again at our requirements. We have our Principles, our Handbook and a lot of rules. Not to mention, the hundreds of pages of binding technical standards onshored as part of Brexit preparations.

We know this affects small business – those lacking compliance departments –  most. While they see the benefits that regulation brings to their firms, many struggle to understand how FCA regulation applies to them.

They find the Handbook difficult to navigate and rely on external compliance advisors to interpret new rules. Often these advisers have a disincentive to make things simple.

We are exploring if there is more we can make of our Principles to be clearer about our expectations.

For example, one of our Principles for Business requires firms to communicate in a way which is fair, clear and not misleading, and pays due regard to the information needs of its clients.

Reading this in 2019, is quite difficult – a mouthful actually. And with our knowledge of behavioural economics, it seems like too low a bar. Its focus is the firm’s processes, rather than the outcome we want to see – consumers understanding their options.

We also have large numbers of rules outlining what should be disclosed to a customer at each stage of the sales process. But even assuming a firm does comply with all these rules, there’s no guarantee the consumer will properly understand the information they’re being given.

So as part of the Principles Review, we will consider things like requiring firms to ensure consumer understanding.

We also hope to simplify and streamline our rulebook through our Handbook Review.

This does not mean a light-touch approach, nor does it imply that market participants will have a free hand. Rules remain important. But hopefully clearer and easier to understand.

The fifth and final step concerns technology and the opportunity it presents to bridge the information asymmetry between customers and providers.

Much of our Handbook is technology neutral, and we have enabled innovation over the last few years.

But our rules feel increasingly analogue in a digital world.

Many practices firms use are simply digitised versions of analogue processes – like PDF statements – rather than truly digital services.

Technology may help us deliver solutions that meet customer needs.

To achieve this, we need regulation that is agile and doesn’t become outdated as domestic and global markets evolve, resulting in inefficiencies and consumers being unduly exposed to risk and harm. This requires a bold approach and the full use of tools given to us by Parliament. It also means a focus on simplicity, clarity and real-world effectiveness.

On disclosure, for example, we could improve consumer understanding through a 2-way process using a mobile phone, testing that understanding throughout the sales process.

All of this amounts to a new approach where rules are designed to fit the end-purpose they serve – outcomes-based regulation.

Simply put, our aim is to to be a regulator fit for the age we’re in.

Conclusion

We have the opportunity to re-shape how financial services regulation works in the UK.

The FCA has a key role to play – improving how markets operate, preventing harm from occurring and serving the public interest.

It is only right for us to constantly assess the direction of travel and tailor our approach to ensure we continue to deliver on our objectives.

To achieve this, we need regulation that is agile and doesn’t become outdated as domestic and global markets evolve, resulting in inefficiencies and consumers being unduly exposed to risk and harm.

This requires a bold approach and the full use of tools given to us by Parliament. It also means a focus on simplicity, clarity and real-world effectiveness.

By putting outcomes at the heart of the debate in the coming months we want to ensure financial services markets serve the public interest, now and in the long term.

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Curzon Rose Limited | FCA

Almost all firms and individuals offering, promoting or selling financial services or products in the UK have to be authorised by us.

However, some firms act without our authorisation and some knowingly run investment scams. 

This firm is not authorised by us and is targeting people in the UK. Based upon information we hold, we believe it is carrying on regulated activities which require authorisation.

Curzon Rose Limited

Address: St George’s Court, Winnington Avenue, Northwich, Cheshire, CW8 4EE

How to protect yourself

We strongly advise you to only deal with financial firms that are authorised by us, and check the Financial Services Register to ensure they are. It has information on firms and individuals that are, or have been, regulated by us.

If a firm does not appear on the Register but claims it does, contact our Consumer Helpline on 0800 111 6768.

There are more steps you should take to avoid scams and unauthorised firms.

If you use an unauthorised firm, you won’t have access to the Financial Ombudsman Service or Financial Services Compensation Scheme (FSCS) so you’re unlikely to get your money back if things go wrong.

If you use an authorised firm, access to the Financial Ombudsman Service and FSCS protection will depend on the investment you are making and the service the firm is providing. If you would like further information about protection, the authorised firm should be able to help.

Report an unauthorised firm

If you think you have been approached by an unauthorised firm or contacted about a scam, you should contact our Consumer Helpline on 0800 111 6768. If you were offered, bought or sold shares, you can use our reporting form.

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Update on RFX Financial Services Limited

On 10 October 2019, RFX Financial Services Limited voluntarily agreed to a number of FCA requirements, including:

  • the firm must not carry on any regulated activities
  • it must not dispose of, deal with or diminish the value of any of its assets or authorise any transfer of any funds held on its behalf or on behalf of customers without the FCA’s prior written approval
  • it must promptly issue appropriate communications to customers in relation to the above.

This is to protect the interests of the firm’s customers. Any customer with questions should contact the firm on 0203 848 1860 or [email protected].

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