Financial technologies such as peer-to-peer lending, robo-investing and digital currencies are here to stay and regulation and laws have to catch up, Grant Holley writes.
“If you are a professional adviser and have strong relationships with your clients, you build on trust and transparency, and if your client perceives that you deliver value, then I do not think you need to be fearful of the new world. I think your clients will stay with you.” – ASIC Chair, Greg Medcraft.
There is much being said and written about financial technologies (fintech), and what this will mean for the financial services industry — and for good reason.
At the recent industry summit, Craig Dunn, Chairman of the new Sydney-based not-for-profit fintech hub, Stone & Chalk, likened the digital revolution to the industrial revolution.
It is doing for intellectual power what the industrial revolution did for manual labour. The structural changes and the opportunities for economic growth have the potential to be just as great for industries and for economies.
Countries who do not ‘get on board’ risk becoming the backwaters of the next century.
Moore’s law, although more an observation than a law of physics, says that the number of transistors in a dense, integrated circuit doubles every two years. This has held true for around 50 years. It has also held true for the electronic devices that benefit from Moore’s law. Basically, once something becomes digital, Moore’s law seems to apply to it, and productivity gains become exponential; in other words ‘change is increasingly rapid’.
Applied to the way money moves from people who do not need it today to people who do need it today (i.e. to the financial services industry), digitisation is leading to innovations in the way we lend and borrow money, the way we receive advice and deal in financial products, the way we pay for things, and the very concept of ‘what is money’.
Digital currencies, peer-to-peer lending, crowd funding, robo-investing and personalised payment systems are either here or in the process of being here. They are not going away. They will gain momentum rapidly.
A new world
So, what does this mean for the Australian Securities and Investments Commission’s (ASIC’s) world and what does it mean for financial planners and the broader financial services industry?
Through no fault of their own, regulators are necessarily hamstrung in responding to rapid changes in markets.
This is a consequence of their role, which is to administer the laws that confer functions and powers upon them.
The laws have been made in response to yesterday’s world, and to yesterday’s problems.
As the pace of change increases, yesterday becomes obsolete more and more quickly, perhaps at a rate that is inversely proportional to Moore’s law.
Perhaps we could call that Lesser’s Law. Sometimes, yesterday’s solutions can become today’s problems.
Take peer-to-peer lending for example. Peer-to-peer lenders lend money. If this is to consumers, they are caught by the Australian Credit Licensing Regime.
The other part of their business is in collecting the funds to lend out. They are not banks.
The way they collect funds is, in this country, likely to be caught by the laws relating to managed investment schemes, which, if the money is to be raised from retail clients, must be registered.
That is expensive, cumbersome and is a regime that has arguably failed to protect investors in any event, with several high profile and large scale collapses.
This is an industry ripe for disruption, but the existing legal framework is an inhibitor to this.
The productivity and efficiency improvements that could flow from the disruption are therefore delayed and, when they do, come at a greater cost to consumers.
We are fortunate to have some good thinkers and policy brains within our regulators, ASIC Chair Greg Medcraft’s statement that “ASIC is keen to facilitate innovation” is to be welcomed.
Although ASIC is working within the constraints referred to above, it can ease the way through its broader policy objectives, the way in which it administers the existing laws, and through class order relief.
It can assist industry through its regulatory guides. ASIC has set up a Financial Innovation taskforce headed by ASIC commissioner, John Price, and is actively seeking to engage with industry and gatekeepers.
As already mentioned, the New South Wales government has established a fintech hub, Stone & Chalk, in Sydney.
This not-for-profit organisation was created to foster collaboration and greater innovation. This is recognition of the financial benefits that could flow to the State from the fintech industry.
In London, perhaps the world’s hottest fintech location, the industry reportedly employs around 45,000 people.
Making sense of the new world
What does it mean for existing participants in the financial services industry? As with most change, there are threats and there are opportunities.
Where these technologies will be most effective is where industry has become fat off the status quo.
If there is an absence of competition, prices will be too high, policies will be inflexible, one size will be made to fit all.
Robo-investing will be attractive to people that feel they do not get value from their financial adviser, or who have lost their trust and confidence in the industry.
It is an exciting time for the energetic and for those willing to grasp what may be the biggest thing to hit modern society since Watt’s steam engine. Hang on, it’s going to be quite a ride.
Peer-to-peer lenders will be attractive to investors who are happy to enter into risk on a more fully informed and granular basis than a bank is able to, or has been prepared to.
Those borrowing will have access to funds at rates that better reflect their actual risk, or where they may not have been able to borrow funds at all.
Payments will be able to be made more directly through digital currencies.
We will be able to choose whether we pay for things using our pay wave, or our watches, or even, as the Heritage Bank has made available, using the sleeve of our M.J Bale suit.
Changing and adapting
What do you need to be successful in the new world?
Fortunately there are some constants. Markets run on trust and confidence. These new technologies are just enablers.
They will only be successful if we can have trust and confidence that the arrangements we enter into will be honoured.
Transparency, reliability, integrity of systems, processes and people will remain critical to the financial services industry.
Of course, laws and regulators have a major role to play here. But so does the industry.
Ethics, the right motivation, putting the customer (whose interests we serve) first, are all critical to these technologies taking off.
If you are a professional adviser and have strong relationships with your clients, you build on trust and transparency, and if your client perceives that you deliver value, then I do not think you need to be fearful of the new world. I think your clients will stay with you.
Of course, you will need to stay informed about developments in fintech and be willing to adopt and adapt.
It may add to or change your service offering. If you are like our firm, you will engage in regular business planning.
This will include understanding the factors outside your business and outside your control, such as the economy, changes in technology, changes in law, etc.
You will use your risk management framework to identify the risks associated with these, including the risk of missing out on opportunities.
Ask yourself
Will you be able to provide some things to your clients more cost effectively? Will there be lines of credit opening up that have not previously been available and which may be appropriate?
Do you have the people with the expertise your business needs to adapt? What does this mean for your marketing and how are you going to finance the decisions you make?
In the financial services industry this is not a time for the fainthearted. It is, however, an exciting time for the energetic and for those willing to grasp what may be the biggest thing to hit modern society since Watt’s steam engine. Hang on, it’s going to be quite a ride.
Grant Holley is a partner at Holley Nethercote.
