For the past decade, the All-blacks have undoubtedly been the dominant force in world rugby and arguably in world sport. Whilst watching them recently, I was struck by how they continually seem to be a step or two ahead of the pack (please excuse the pun).
Indeed, they’re able to maintain their place at the top despite the rules of the game and competitors around them shifting regularly. This brought me to think about our own industry and some of the interesting parallels that can be drawn with regulation.
Let me start firstly with the need for regulation. In fact our Industry could not exist without it. All lenders depend on the long established rights of recourse to recover your loans if the borrower falls into arrears, your warehouse funders and institutional buyers of your bonds require that you have perfected the documentation of your loans and related security. Furthermore, the consumers borrowing from you would not be buying property in the first place if they could not rely on long established rights around property ownership. Indeed there’s a clear correlation across the world between states that have secure property rights and those that have enjoyed long term growth in credit and in per capita income.
Economists describe how regulation typically exists for the purpose of co-ordination, information or to address externalities. And in case you are thinking regulation just means the PRA and the FCA, regulation comes in many forms. At one end of the spectrum we have accepted social practices, we have self-regulation and at the other end we have statutory regulators and formal legislation.
Consider the line down the middle of the road. Imagine the chaos if we had never agreed on which side of the road to drive? This is an example of co-ordination, far more important than debating the merits of driving on the left or the right is that we picked a side and stuck to it. Without that simple regulation of a line down the middle of the road the innovations of Henry Ford, William Morris and many others would have stalled, we would not have over 1.2bn automobiles on our roads and Tesla would not be pioneering driverless cars.
The Financial Services industry is so important and central to society that it needs to be protected to sustain a vibrant, healthy economy and regulation is vital to securing this. Heavier touch regulation in financial services is pretty much non-negotiable, but the important question is whether we can do this in a way that does not stifle innovation.
So what about recent regulation? How do we rate the Mortgage Market Review? The MMR was one of the biggest reforms to hit our market since statutory regulation came in. It’s clear that regulation was required to ensure that the market continued to operate at safe levels, but there were a number of stories post implementation of customers sitting through interviews lasting for hours looking deep into their circumstances. As a result, we heard a new phrase ‘you can’t afford a cheaper mortgage’ where some customers were unable to move onto cheaper deals due to the overly stringent underwriting.
Since the original launch we’ve seen the pendulum swing back to more appropriate levels and this is a key point – under-regulation or no regulation at all often leads to real issues which then prompt a response of over-regulation. When a car under steers into a bend, the subsequent over correction often leads to a skid or crash. Having regulations grow with innovation helps to avoid these crashes.
The regulation of data and data privacy in particular is also a big topic today. We’ve seen a couple of recent examples of where regulation (and lack of it) is impacting on innovation. Recently we learned of an innovative new initiative by Admiral. They wanted to help drivers in high risk categories get up to a 15% discount on their motor premium by using social media data to better underwrite the risk. Customers would have to explicitly opt in. So far so sensible.
However, the media opted for hyperbole describing the invasion of privacy as “terrifying” and the shadow minister for the digital economy, Louise Haigh, said that ‘the Government needs to establish the boundaries around the use of data on social media’, all prompting Facebook to block the initiative. What we have here is a clear example of how the absence of regulation means we lack a sensible framework for innovation, and instead it has been killed off.
2016 may well have been seen as a watershed year for regulatory progress on data sharing. We had the new Credit Data Sharing Scheme for SME’s – under government plans, enhanced credit information held by nine banks shared equally with other finance providers that agreed to share their own credit data. And we had the CMA pronouncement on Open Banking with incumbents providing API’s by 2018. These initiatives should make it easier for challenger banks and alternative finance providers to assess the creditworthiness of potential borrowers. These are really good examples of applying sensible regulation and guidance to open a market up for new entrants and providing innovation that directly benefits the end customer.
So we come full circle back to the All Blacks. The great rugby coach Ian McGeechan was recently quoted as saying that the All Blacks are around 2 years ahead of any of their closest competitors. The one way they stay this far ahead is to work with new regulations and use them to their advantage.
Rugby fans know that the laws of the game are constantly being amended – the line out, the scrum, the ruck, maul and tackle. The IRB often uses the New Zealand domestic and international rugby teams to trial new rules and regulations ahead of roll out. What it does give New Zealand rugby is early sight of the potential impact of new regulations and an opportunity to look at how to best harness them to their advantage. In essence, they’re working with regulations in order to get ahead and gain that small competitive advantage that can be the difference between winning and losing in elite sport.
There’s a nice parallel with the “Regulatory Sandbox” tool that our own FCA has brought in to test and refine innovative product ideas prior to go live. It is a good example of regulation allowing innovation to develop at a safe pace and also providing consumers with the confidence to ensure it’s widely adopted. We should be trying to take a leaf out of the All Blacks playbook and get into that sandbox.