This is part of a keynote speech given by Gerard Lyons on Tuesday 20th March, hosted at the offices of ICBC Standard Bank, coinciding with London Innovate Finance Week. This part of the speech explores the City and technology, and the wider technology issues that are likely to impact the world of finance.
London and tech
One of the most significant developments for the City over the 20 months since the June 2016 Referendum was the decision by the largest tech firms, led by Google, and followed by others, to reaffirm their commitment to, or announce new investment in, London.
There were many reasons for this, but the factors that add to London’s appeal for the tech sector help include the widespread acceptance that the City will remain the major financial centre of Europe. Many features of the City have been described as Brexit-proof and these help in its appeal to the technology sector, such as the English language, time zone and use of English Law to underpin contracts, plus the depth of skills, knowledge and infrastructure found in London.
The biggest challenge, however, has been over citizens’ rights post Brexit, with one in eight workers in the City from the rest of the EU. But now, after initial uncertainty, this issue appears to have been addressed.
Also, let’s not dilute the influence of the ‘London Vibe’ that adds to its appeal, and to the fact that the UK is increasingly positioning itself for the Fourth Industrial Revolution.
The net result is that London is viewed as having positioned itself well to be the world’s leading FinTech centre, in the face of increasing competition from New York and from Asian financial centres.
In a recent speech at the ‘Innovate Finance Global Summit’, City minister John Glen highlighted that the UK tech sector is close to a £7 billion industry with 60,000 jobs and close to 1,600 firms.
To add to this appeal, last autumn the Chancellor announced a £23 billion National Productivity Fund and a UK government Financial Sector Strategy is on the way. While that strategy paper may be forthcoming, much good work has already been done. For instance, 2015 saw the creation of a Payments System Regulator and in 2017 the Bank of England established a FinTech Accelerator, with innovative central bank solutions.
The UK is also cementing its international ties to strengthen its position. Last year saw the bilateral UK India FinTech Conference in Mumbai. Also there are technology bridges to deepen ties in this area with China, South Korea and Singapore. For example, the start of this year saw the UK-China Financial Security City Project in Xiongan.
In addition, the UK is creating an enabling environment to make itself attractive to business, highlighted by the reduction already seen in corporation tax, from 28% to 19%, and the plan for this to fall further, to 17% in 2020.
What about technology itself?
One can look at this in generic terms, but I also will look at it in terms of the apexes of a triangle consisting of providers, customers and the industry itself.
London has always been at the forefront of change in the financial sector. In the 19th century it was ledgers, now in the 21st century it is distributive ledgers and blockchain, among others.
In June 2016, speaking at the Mansion House, the Governor of the Bank of England Mark Carney said, “FinTech has the potential to deliver a more resilient financial infrastructure, more effective trade and settlement and new ways to encode, share and analyse data.”
For providers of financial services, there are six major financial areas that are likely to be impacted by technology: payments; lending; retail banking; insurance; wealth management and transactions settlement.
Technology will allow new entrants to disintermediate the market and to help transform key parts of the industry, through speed and enhanced connectivity, for example.
One could call this an evolution, based on what we have seen in the past, or a revolution, based on the pace and scale of change, resulting in a diverse, resilient and effective industry. For the incumbents, they will be exposed to greater competition, with some of their business models placed under threat, forcing them to invest, innovate, even buy the new entrants, or concede ground to them.
This impact of technology, therefore, is good news for consumers.
Let me explain using the example of Netwealth Investments, where I am chief economic strategist. We help customers to “control the controllables” – such as time in the market; diversification; ensuring they use tax allowances or wrappers; and focusing on fees. We use technology to enhance our financial expertise and provide an excellent service at a fraction of the fees of incumbents.
The power of technology is not just about being cheaper, it is about being more efficient and easier to use, and thus offering better value.
Great technology and impeccable service is also a powerful combination. It allows consumers to upgrade and lower their costs with the net result of being more inclusive, better connected, more informed and increasingly empowered.
Finally, the industry
The Financial Stability Board, which helps oversee finance at a global level, has highlighted how technology contributes to a financial system that is inclusive, efficient, effective and resilient.
Supervision and stability are vital aspects, key to the financial system. Technology has an impact on both. For supervisors, technology reinforces competition with, for instance, faster settlement and more efficient capital allocation.
In terms of stability, technology allows more diverse business models and alternative providers. However, a challenge emerges in terms of data. The combination of enhanced technology and data allows new correlations between financial series to be identified, possibly leading to herding behaviour and new risks.
There are many other areas, too. A necessity, is the importance of data democracy and security of data. Also, technology has focused attention on crypto-currencies and the importance of the need for appropriate regulation in this area. In addition to FinTech, London has seen the growth of RegTech and of technology-driven regulation.
To conclude – I have focused on technology and its importance for innovative finance in London and the impact on providers, consumers and the wider industry.
But we should also recognise the importance of these effects on wider economic and financial issues. For instance, given the hosts of this event, the future relationship between China and the UK. This year sees the 40th anniversary of the opening up of China’s economy. As China moves to its next stage of development, the UK will have much to offer, given its expertise in business, professional and financial services. Future flows will also be two way, as China looks abroad, including to the UK, seeking asset, brand and technology investments. This points to a strong future UK-China relationship, with London playing a leading role.