UK watchdog wants an "innovation heaven" in financial products

Thu May 29, 2014 7:41am EDT

* Watchdog looking to tear down barriers to innovation

* Wriggle room limited by tougher EU consumer safeguards

* Wheatley warns there won't be return to light touch

By Huw Jones

LONDON, May 29 (Reuters) - Britain's markets regulator pledged on Thursday to offer a more sympathetic ear to financial firms wanting to develop new products that help customers save for their old age.

Martin Wheatley, chief executive of the Financial Conduct Authority (FCA), struck a more conciliatory note after lawyers have criticised the year-old watchdog for being heavy handed and effectively vetoing new products.

The FCA was launched in April 2013 to protect consumers better after a string of mis-selling scandals ranging from loan insurance to pensions spanning several decades.

Wheatley outlined plans to encourage more innovation in financial products, especially around rapid advances in technology such as using mobile phones for banking and investments online like "peer to peer" lending.

He said a market that works well is one that allows for much-needed innovation as the "middle ground" of consumers were not being served well, partly because firms argue that a welter of new rules make it harder to come up with new products.

The need for innovation is also being fuelled by the UK government's decision to end compulsory annuities for people with retirement pots after the FCA called the market disorderly.

The FCA's predecessor had told the industry to be "very afraid" but Wheatley said this was at the height of the 2007-09 financial crisis when taxpayers had to rescue banks.

"The tone is different because I think we recognise that our core objective of making markets work well is not just served by locking down everything that could go wrong," Wheatley told a Bloomberg News event.

Next month the FCA will begin a public consultation on how limited or simplified automated advice could be given to customers online without the financial firm having to comply with the full panoply of regulatory safeguards.

The watchdog will look at ways to make disclosures to customers more meaningful, Wheatley said as he criticised an unnamed bank for having terms and conditions on its basic bank account that are longer than Shakespeare's Macbeth.

INNOVATION HEAVEN

The FCA will identify barriers to innovation and set up a hub to give compliance advice for innovative products. There will also be an "incubator" to support innovative businesses as they seek authorisation from the watchdog.

Wheatley said London has the capacity to become a European trendsetter in a booming tech scene and create an "innovation heaven", though there won't be a return to the pre-crisis "light touch" regime.

"We want firms to have the freedom to break new ground, but there is limited societal appetite to accept more scandals in the industry," Wheatley added.

As economic recovery gets underway, there is also risk that over-confidence sets in with lobbying to unpick reforms, which would be dangerous, he said.

The FCA's wriggle room to encourage innovation and offer "waivers" from some rules will be limited by the European Union, whose financial watchdogs are already moving onto the retail turf, encouraged by national supervisory failures in the past.

The European Securities and Markets Authority (ESMA), and EU watchdog, will get powers to go over the heads of national supervisors to ban a harmful products. Transparency and disclosure requirements in markets covered by EU rules, such as mutual funds, are also being toughened up.

"Clearly where there is very definitive rules in the European framework, then they have to be complied with. Our flexibility will be to look at principles and outcomes as much as we can," Wheatley said. (Reporting by Huw Jones; editing by Susan Thomas)