Economic Secretary on the government’s approach to innovative finance and peer-to-peer lending.
When I came to this job just under half a year ago, I set out my vision for the financial services sector. I was very clear that financial services had to deliver for the customer.
There are two aspects to this.
The first is to work with the customer to help them meet their long-term aspirations – whether that’s buying a home, saving for a comfortable retirement, or setting up a business.
The second is to make life easier for them in their day-to-day transactions. That could be as simple as enabling retail banking services to be available on a smartphone, rather than making the customer travel to a branch.
As some of the most innovative players in the market, I believe you are brilliantly placed to rise to this challenge.
I see three factors as creating specific opportunities for you.
The first is the technological revolution.
The frontiers of what we can do with technology are growing bigger and bigger every year. It’s unprecedentedly rapid change, and that’s exciting.
We want to harness the power of technology in financial services. Not only does it make the customer’s lives easier – but tech companies innovate; they create opportunities, jobs and growth; they expand the economy.
Our ambition is for the UK to be the global hub for financial technology – and I’ll be talking a little later about how we make that a reality.
The second factor is that here in the UK, we are making radical changes to give savers more freedom to use the money they’ve earned in the way that works best for them.
It’s a very basic principle: it’s your money; you’ve earned it; you should be able to choose how you use it.
On pensions, for example, this government’s reforms are giving savers unprecedented access to their pension savings. To date, over 200,000 have taken advantage of the new flexibilities.
With greater freedoms come greater responsibilities. So what we will be seeing over the coming years is a fresh wave of customers who are much better-informed, and much keener to exercise these new powers – not least, through investing.
A real opportunity for the financial services sector to deliver for them.
The third factor is that, as a government, we have made it a priority to inject choice and competition into the retail banking sector.
More competition means that banks are incentivised to offer the best possible products and services to their customers.
There have been a number of important steps forward in this area:
- introduction of the Current Account Switch Service and midata, so customers can compare personal current accounts and switch where they see a better deal – simply, quickly and reliably
- legislating to require the biggest banks to share credit data on small businesses, so alternative finance providers are more able to compete and make effective lending decisions
- committing to deliver an open standard for Application Programming Interfaces in UK banking, so that challenger banks, FinTechs and other innovators can use bank data to provide a range of value-added services to consumers
- substantially lowering barriers to entry by making it quicker and easier for new banks to enter the market;
- creating the new Payment Systems Regulator, so challenger banks can access central payment systems on fair and equal terms; and embedding competition objectives in our conduct and regulatory authorities
- not least, creating a single, stronger competition regulator: the Competition and Markets Authority (CMA). We look forward to the CMA’s provisional findings this week on its market investigation into retail banking, which will be an important step to improve competition
So, you have the technology.
You have the customers.
You have a Government who is keen to encourage competition.
All these factors are combining to create real opportunities for innovative firms to enter the market, and to succeed.
With this in mind, I’d like to talk about two areas of particular interest to us in the UK: peer-to-peer lending, and fintech.
We believe that Peer to Peer lending (P2P) is a brilliantly innovative new form of finance – which we want to see continue to grow and evolve.
So many of our small businesses tell us about the difficulty of accessing finance. Many of you in the audience know exactly what I mean! Peer-to-peer lending can plug that gap.
I am proud of the fact that the UK has the largest P2P and alternative finance sector in Europe.
We’ve worked hard for that.
We knew, for example, that for the sector to mature, it would be important to bring it within the correct statutory framework.
Proportionate regulation will protect consumers lending and borrowing via a P2P platform and allow the sector to continue to grow.
That is why, in November 2012, we announced our intention to bring P2P lending within the scope of the Financial Conduct Authority (FCA) from April 2014.
Early last year, the FCA published a policy statement outlining its rules for P2P lending, which we welcomed.
That was the first part. The second part is putting in place policies to support the sector grow and develop.
We’ve supported the P2P sector through the Business Finance Partnership and the British Business Bank’s Investment Programme. So far, these programmes have committed £80 million of funding to P2P lending platforms.
As part of the savings package we announced in the March 2015 Budget, we confirmed we will be expanding the range of products that can be held in stocks and shares ISAs to include loans made through P2P platforms.
Holding P2P loans within an ISA will mean that interest received on the loans will not be subject to tax.
These rules will come into force from the start of the next tax year, on 6 April 2016.
From earlier this year, investors in P2P platforms have been allowed to offset any losses from P2P loans which go bad against other P2P income, reducing the amount of income tax that the individual has to pay on the P2P interest.
The objective here is to level the playing field, and make P2P more attractive to investors by equalising the advantage banks and other investment products have over them.
We have also been consulting with industry on the implementation of new withholding tax obligations, to apply across all P2P lending platforms from April 2017.
I appreciate the engagement this sector has had with the Government on this issue, and we will be publishing our response soon – watch this space.
Of course, this is an ongoing conversation. We are always keen to hear how we can do more.
So I look forward to working with you as this sector goes from strength to strength.
P2P is just one part of the rapidly expanding fintech sector.
I am proud that this is a sector where the UK is already performing very strongly.
We are one of the fastest growing regions in the world for fintech. 2014, fintech investment in the UK & Ireland grew 136%, reaching £410 million – accounting for 42% of the European total.
135,000 people were employed by the sector last year, across the whole of the country – and our GDP was £20 billion greater as a result of the sector’s activities.
These activities cover a lot of areas. When many people think of fintech, they often think of payment devices such as Pingit, or TransferWise, which provides people and businesses with a lower cost alternative for sending money overseas.
But there are many others. Just a couple of weeks ago I was in Canary Wharf – somewhat less glamorous than the Hilton Metropole – to talk about robo-advice, which uses algorithms to provide financial advice online. That’s quicker and cheaper than the traditional face-to-face model.
So we see fintech as a tool: a means to an end rather than an end in itself. It’s a way of providing financial services in a new, more convenient way.
And it’s a force for encouraging competition: the pressure it applies to established financial institutions means that these incumbents have to work harder to gain and retain customers.
Our ambition is very simple. We’re already a major player in fintech. But we want to be the major player.
This area – perhaps more so than any other area – is one where we cannot afford to let the grass grow under our feet.
The pace of technological change means that there are new developments every week. We have to keep up.
And we’ve invested major effort in making sure that fintech can prosper here in the UK.
We now have a Special Envoy for fintech in the form of Eileen Burbidge – who is helping develop our fintech strategy, and promoting the UK as a global fintech hub both at home and around the world.
To ensure our international competitiveness, we will shortly be launching an international fintech benchmarking exercise – looking at how we compare with other countries, identifying emerging areas of opportunity, and seeing where we can learn from best practice elsewhere.
We are delivering an open standard for application programming interfaces to improve competition and innovation in UK banking.
We’re working hard to create the right regulatory regime for digital currencies – one which is right for digital currency businesses and users. Our efforts have already resulted in digital currency businesses relocating to the UK.
And we are working closely with the Financial Conduct Authority to make sure that we get the statutory framework for fintech spot-on.
Together with the FCA, we launched the Innovation Hub, which helps innovative businesses to understand the regulatory framework and apply for FCA authorisation.
Since its launch, it has helped over 100 innovative businesses.
To ensure that regulation doesn’t act as a barrier to innovation, the FCA are currently assessing the feasibility of something called a ‘regulatory sandbox’ – a space that would allow innovators to experiment with new ideas and real customers at an early stage, without the burden of excessive regulation, but with the informed consent of consumers and proper risk management.
And, in what could be a significant development, the FCA is also working with the the Prudential Regulation Authority to identify how technology can help deliver regulatory requirements.
We’re supporting the areas underpinning excellence in fintech too: skills, science, research and development.
Last week I was at the British Library in Bloomsbury, where we’ve invested £42 million in the Alan Turing Institute to bring together leaders in advanced mathematics and computer science.
So right here on our doorstep, we’re training the next generation of experts in high performance computing, mathematical modelling and software engineering – and creating the UK PhD Centre in Financial Computing at University College London.
So not only do we have the tools…
We’re investing in the brainpower too!
It’s a sector we want to see succeed – so we will help you do so.
It’s a win-win situation.
P2P platforms and fintech provide competition, ideas, and technology– making people’s lives better and the markets more effective.
When you do well, your businesses flourish. Excellence breeds excellence.
Customers have the services they need to meet their aspirations.
And this country becomes better off, as a result of all this activity taking place here in the UK.
We are ambitious, because you are ambitious too. I can sense the energy in this room.
The businesses here – from Funding Circle to RateSetter to Zopa – are some of the most innovative in Europe.
So I look forward to hearing your questions – and I hope that this is a really productive, fruitful conference.