FCA shares “Innovation insights”

The FCA has published a report looking at what’s changing in the fintech markets, where the risks are shifting and what the FCA is doing to help firms.

Its main conclusions are:

• funding is becoming more concentrated – last year, global fintech investment in over 4,500 deals exceeded $130bn, but it was concentrated on fewer firms, which were larger and more mature. Funding came mainly from venture capital (even more so in the UK than on average globally), but the larger contributions globally came from private equity. In the UK, UK investors contributed only 13% of funding to the top 15 deals – and these investors were largely asset managers and private equity. Funding was almost always more in single rounds. RegTech firms attracted notable domestic funding and accounted for a high percentage of sandbox applications;
• firms are focusing on the regulatory impact of new products at an early stage – and the FCA is pleased that firms are engaging early as it say that those that do so and test safely are in the best place to scale responsibly; and
• following on from this, it has seen an almost 50% increase in applications to its various sandboxes, often for products involving AI, DLT and open banking and finance. 35% of applications came from the payments and digital assets sector, and 91% of the firms were from the UK – 49% from London. 87% of firms were start ups with fewer than 10 employees.
• Key trends the FCA is seeing include:
  • blockchain-enabled payment;
  • embedded finance;
  • financial inclusion;
  • AI-driven personalisation;
  • operational automation;
  • open banking;
  • digital infrastructures within wholesale financial markets;
  • the RegTech evolution; and
  • in the retail lending markets, lenders focusing on supporting financial understanding and long-term resilience.

Firms that applied to the sandboxes but who did not progress include those whose propositions might in fact be quite conventional in the market by now, so not truly innovative, or those where firms have not provided suitable testing plans or clearly indicated consumer benefit.

The FCA is also pleased that it has worked to strengthen the UK’s position in open finance and has supported growth in stablecoins and digital assets as well as continuing to engage globally.