FinTech landscape presents risks as well as opportunities, says FCA

The Financial Conduct Authority (FCA) today warned of the potential risks of technological innovation.

According to the FCA's Business Plan for 2017/18, the increased use of new technologies pose potential risks to the industry and to consumers:

  • Cyber attacks and fraud are increasing, with 2.11 million victims of cyber crime reported in 2015/16.
  • Vulnerable consumers are often the target of cyber scams.
  • Consumers with a low income, a poor credit history, or a criminal record may be at higher risk of exclusion by automated services.
  • Consumers, especially younger consumers, are less likely to read terms and conditions that are provided in an online format.
  • New market entrants are sometimes not regulated by the FCA, and may be unaware of the scope of their regulatory obligations. 

John Salmon, Partner in Hogan Lovells' Financial Institutions Sector, commented:

"The FCA's Business Plan recognises that, with the rise of reliance on technology by both traditional financial institutions and new FinTechs, this places significant risk on the quality of the IT infrastructure. It particularly refers to the need to ensure that there is good governance of IT and proper attention is made to change management.

"The FCA also makes reference to firms needing to make sure they understand what data they collect and how the data is used and also what AI and algorithms they use. This is clearly really important from the FCA's point of view but may be challenging for those firms wanting to use machine learning techniques."

Michael Thomas, also a Partner in Hogan Lovells' Financial Institutions Sector, commented:

"There has been, rightly, a certain amount of cheerleading regarding the possibilities of FinTech in terms of disruption and market opportunities, such as the opening up of customer data due to PSD 2 or the use of blockchain.

"However, as the FCA has highlighted, this is taking place against a backdrop of the need to find efficiency savings, firms transitioning from complex legacy systems, and the increasing importance of outsourcing. Existing firms will have to ensure that their compliance solutions are in step with their IT change management, while new market entrants must make sure they are aware of their obligations under the regulatory system."

The Risk Outlook on technological innovation is in the FCA's Business Plan for 2017/18, which was published today and is available clicking here:

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