While the financial services industry has long been the bête noire of media and political opinion, in recent years attention has focussed on Big Tech. Aggressive tax domiciling and anti-trust cases, coupled with fears over data harvesting, fake news and exploitation, has led to major UK tech firms falling in the regulatory cross hairs.
In many ways this is not surprising – the US Government has historically broken up natural monopolies, and Google/ Facebook collectively control 58% of global digital advertising revenues. However, with the US unwilling to act, it has been left to regulators globally to regulate different aspects of the digital giants.
The latest attempt at UK regulation comes in the form of the “online harms” white paper that the Government launched today (with a 12-week consulting period). Ostensibly it aims to ensure that digital platforms are responsible for the content that people post on them (and the impacts of the content).
View from Gareth Jones, Associate Partner in Newgate’s Public Policy team on the launch of today’s white paper:-
“While these proposals are likely to prompt much debate, it should be noted that the regulation of tech giants and social media is currently one of the few areas where there is a degree of consensus in Westminster at the moment. The Labour Party and the DCMS Select Committee have repeatedly argued for greater controls on online content and the digital market and with the publication of these proposals, the Government appears to be responding to political pressure.
There are of course a number of difficulties in regulating this market in practice and the consultation itself offers a fair degree of leeway. For instance, it is not clear at the moment whether enforcement will be done by a brand new online regulator or by an existing regulator, such as Ofcom.”
Notwithstanding the practical difficulties of regulating content, there are important considerations for the financial services industry.
For many years the financial services industry has watched over its shoulder at the major US tech companies, expecting them to launch their ever-growing empires into financial services. To date, this has only materialised sporadically and mainly in payments (Apple’s new credit card is the exception, though it is run through Barclays).
But why has Big Tech not gone into financial services? The answer seems to be two-fold – firstly, the Return on Equity (RoE) in financial services is currently lower than technology. The banking industry in the US (money centres) offers ROE of 11.48%[i]. Non-Bank financial services is 0.12% and asset management is 16.18%. By comparison, Facebook’s RoE is 26.28%; Alphabet’s (Google) is 18.34%[ii].
The reason behind lower RoE can, in many instances, be ascribed to the costs of greater regulation. Financial services companies must maintain capital ratios, invest in compliance teams and record keeping. In addition, regimens such as the FCA’s senior manager’s regime make senior executives fully accountable for the culture (and actions) of their staff.
Such regulatory strictures have long been unattractive to Big Tech entering financial services.
In the “online harms” white paper, the Government actively raises the “risk-based approach” and change of risk culture created by the “senior manager’s regime”. In other words, some current thinking for future Big Tech regulation is informed by current financial services regulation.
If such an approach is pushed through, it would likely significantly impact how Big Tech works. In turn, this may have implications for the financial services industry. If Big Tech companies build large compliance teams and executives must take personal responsibility for risk/ culture, then the step to financial services becomes smaller. In other words, many of the aspects of financial services which are unattractive today would become the norm for tech companies.
On the flip side, Big Tech companies many decide that one new regulator is quite enough – thereby sparing the financial service industry from new entrants. But if companies already have the capabilities and systems in place, it may be that the RoE offered by financial services looks steadily more attractive. In addition, much of the incremental performance increases in financial services are being driven by technology.
In such an environment, it may be that the UK financial services industry faces new, well-resourced and capable competitors that have already succeeded in transforming advertising and the high street. The industry would do well to start preparing for such an eventuality.
Charles Ansdell is Managing Partner of Newgate’s Professional and Financial Service practice.
[i] Source: NYU Stern, January 2019
[ii] At 31 Dec 2018