19 - Regulation isn't slowing innovation. Uncertainty is. Lorraine Mouat on getting regulation right

Does regulation really hold innovation back, or is uncertainty the bigger problem?

In this episode of tell.talks, Lorraine Mouat joins us to unpack the relationship between regulation, risk and growth in financial services.

Drawing on experience from both inside financial services firms and regulatory consultancy, Lorraine shares why businesses can become too focused on second-guessing the regulator, what proportionality really means, and why a perfect-looking risk register isn't necessarily a good one.

We also explore the need for better dialogue between firms and regulators, what good governance looks like in practice, and the new challenges emerging as AI, embedded finance and open banking continue to evolve.

A practical conversation about getting regulation right, without letting it stop businesses moving forward.

Transcript

SPEAKER_00 0:06

Welcome to Tel Talks, where we speak to the people shaping today's digital economy. Lorraine is a regulatory specialist working across payments and wider financial services, advising firms on authorization, governance, risk, financial crime, data, regulatory strategy as they grow and evolve. Lorraine, welcome to Tel Talks.

SPEAKER_01 0:26

Hello. I'm very excited to be here. Thank you.

SPEAKER_00 0:29

For those who might not know you, tell us a bit about your background and how you ended up working in regulation and fintech.

SPEAKER_01 0:36

I didn't wake up one day with a burning in my belly to become a regulatory consultant. It kind of happened by accident, to be honest. But I've always worked in financial services. So I guess I started out in industry, operational management type roles, front office, back office operations. And then I moved into the world of compliance, holding sort of head of compliance, head of conduct risk kind of roles. And then before moving into regulatory consultancy. And I think though, when I look at that journey, it's I always, when I'm speaking with a client, I always look at it and think it's kind of good for them because I've had that rounded experience, so I know what it's like at the coal faith, right? I've done that role and that role before doing this role. So I've not just been a consultant my whole life without knowing what it's like to step into someone else's shoes.

SPEAKER_00 1:35

I think that's um that that's quite powerful, isn't it? Really? It's you've lived and breathed it. External consultancies coming into an organization where they've got, you know, their own compliance knowledge and capabilities. Sometimes it's probably a language thing to try to make sure you're communicating in the right way so that they receive what you're trying to advise them on.

SPEAKER_01 1:57

Correct. And I think it's really important to remember that these are businesses, okay? So you've got to have you've got to have the commercial element in your mind as well. And I've got to I am often quite pragmatic as a result, but it's finding that nice middle ground and just translating some of those challenges into something that is still palatable for the business so that they can still do what they want to do, but not veer too far away from the regulation. There's always a line you can't cross, of course, right? But there's nothing to stop you going as close to that line as is comfortable.

SPEAKER_00 2:36

What what have you seen over the years that shaped how you think about regulation today?

SPEAKER_01 2:43

So I think if we go back, that's a really interesting question. I think if we go back to sort of maybe the two say 2007, 2008, right? And you know, round about that um the time with the the big crash and everything. Um it was a wee bit like the Wild West in many ways, okay. I all often describe it as like it's like murder on the Orient Express, like the lights go out, somebody got stabbed, the lights come on, and everyone's going, Well, it wasn't me, but somebody did it. So everyone was just stepping away from that accountability, and that wasn't great. It wasn't great for business, it wasn't great for consumers and markets clearly as as what happened happened. And I think therefore it was necessary. Regulation is is important, has to be there, there has to be um that kind of North Star that that firms need to follow. But then I think what we got was the pendulum almost swung way far in the other direction. And then certainly for me over the last couple of years, I've become very conscious of the fact that it's not that regulation that it's not that firms want the bar to be lower. I don't believe that. I think what where it's kind of gotten a bit stuck is firms not really knowing where the bar is. And and it's that uncertainty, that that uncertainty then creates hesitancy, and that then sort of squishes innovation, competition, and everything now that the government's trying to push forward. So I I think it it it was it's a necessary thing, but that there was a point where it just has gone too far in the wrong direction for me.

SPEAKER_00 4:27

There's a common belief that regulation slows innovation, but you you take a slightly different view that it's actually the uncertainty. What do you what do you think's behind that?

SPEAKER_01 4:39

Most firms are capable of understanding the regulation and how it applies to their business and translating those rules into their business. But I think I think the nervousness comes from they're almost trying to second guess what the regulator wants, and the regulator on occasions isn't very good at giving firms a steer on what that should look like. And so what they're trying to do is firms are trying to regulate for the regulator. So they're trying to do it to say, okay, well, this is this is this is what the regulator wants from me, rather than this is how we're going to apply it in our business proportionately and they're regulating for the regulator and not for their clients, which i is a problem if if that's how most firms are doing it, which I think they are.

SPEAKER_00 5:35

Yeah, I I think you're right there. If if you're if you're thinking up the value chain, i.e. the regulator, then you're not thinking about your customer and how to better serve them ultimately.

SPEAKER_01 5:46

Yeah, absolutely. I think that you know the regulator isn't, and I often say this, the regulator isn't expecting perfection. If I look at a risk register often when I go into a client firm and I see the sea of green, I think to myself, like, okay, who are you kidding actually? That's not real life because we know that to be in business is to carry risk. That's just a natural part of being in business. And the regulator's not expecting perfection in that regard. So what they want to know is, do you know where your risks are? And can you manage them and can you mitigate them effectively? So it's not about having a green risk register because things will and do happen.

SPEAKER_00 6:28

Why do you think so many founders still see the the FCA as the main barrier rather than how they're interpreting the rules?

SPEAKER_01 6:37

Because I think that if you're looking for investment into your business, for example, then and I know from doing sort of regular due diligence on anyone looking for investment or uh into their business, that if you're not, if there's any issues from a regulatory perspective, that's going to give a negative impression to any stakeholder looking to invest, isn't it? So I think it's more about investing um in in the regulatory frameworks for your business.

SPEAKER_00 7:05

Do you think that's a resourcing challenge? Because to me that that sort of sounds and feels like the regulator maybe maybe could do more to engage with with industry.

SPEAKER_01 7:18

I think it's possibly a little bit of both, right? They've got a lot of firms to regulate and to supervise. Uh, but I also think it's a state of mind for the regulator as well, is that, you know, we don't give advice, we don't give guidance, which I get, right? And I think that's that's absolutely fine. But from experience, what I tend to see is this kind of lack of engagement at at the early stages and lack of collaboration from the regulator's side, only to come down really heavily in terms of challenge at the other end when things are starting to go wrong. And then by that time, they've already spent the money, taken the time. That's impactful. So I think that we need to build a bridge, a a better bridge between firms and the regulator to have that open dialogue. Firms look at proportionality slightly differently to what the regulator means. When the regulator talks about proportionality, they mean proportionate to your business risk, not proportionate to your budget. And then often what they do to make sure that they are as tight as they can be, they overbake it. Right? So they they they go too far and create. I've seen frameworks that look like, you know, a small remittance firm looks like they're trying to be Barclay's bank. So just like you just dial it down a minute, dial it back.

SPEAKER_00 8:37

What what what does what does that usually lead to? Where does that uncertainty actually what does it feel like inside a business? Delayed product launch, is it, you know, cost aspect?

SPEAKER_01 8:51

Yeah, so absolutely what you see is it it's going to slow down that innovation, isn't it? And I think just uh given the government's agenda for encouraging growth and competition, what you actually get is firms, you know, sort of taking very slow steps or afraid to take a step. They're afraid to stick their head up above the power of it to say, well, look what we're doing, we've been really innovative, because then they indicate to the regulator that, oh hang on, that's kinda and they don't want that scrutiny and they don't want that focus on them because they're afraid of what else might be might be there that the the regulator might not like. So it it causes firms to sort of sit in the backseat a little bit instead of push them forward.

SPEAKER_00 9:34

If you strip everything back, what does doing it well actually look like in simple terms?

SPEAKER_01 9:41

You need to have a firm understanding of your own business more model relative to the types of permissions that's required. I think it's about having good governance. One of the key focus areas for the regulators is always around good governance. So making sure that you're structured proportionately but in line with the risk that your business uh presents um to customers or to the markets. Because I see so many um frameworks where the risks are they're not tailored to the business model, they're not proportionate to the business model. It's almost like a templated here are some risks. And trust me, the regulator will pick will jump on that immediately. But it is about preparing early, it's about getting all you ducks in a role. You need to have a blueprint from where you where your business wants to be because the regulator will be interested in that, but you don't need to have everything in place all at once, so be proportionate to where you are in your business today.

SPEAKER_00 10:52

Nice, I like that. Moving into this new role you're you're in. Yeah. Um, and and we're we're we're a relatively small business punt punching out from a marketing perspective. You are you were sharing with me some thoughts and ideas around how you how you can how you can get people to consume your um your information, your talk.

SPEAKER_01 11:15

My media.

SPEAKER_00 11:16

Your media. My brand. Your brand.

SPEAKER_01 11:18

Everybody's different in terms of how they digest information, right? And one of the ways I've come up with recently is just doing it on video. I keep them short and sweet, so like five minutes of little snippets of something to say. Because I think the person can have it on in the background and digest it whilst even something else is going on, rather than having to focus on a screen screen story and and read the words.

SPEAKER_00 11:40

You touched on it earlier, one people buy from me. People buy from people.

SPEAKER_01 11:44

Yes. Consulting is a is a is a people business, right? At the end of the day, we're not, you know, we're not selling widgets, we're selling people. I'm gonna come and do a job for you. And I quite often say to clients, the important thing is like, okay, consultancies generally more or less will do a similar job. There might be slight differences in price points, but can you work with me?

SPEAKER_00 12:04

Can you be transparent and can we trust each other?

SPEAKER_01 12:06

That's exactly. And can we speak honestly to each other? That's the other thing. Let's just have honest conversations because I'm not going to tell you all the time what you want to hear.

SPEAKER_00 12:15

As we move into areas like AI, embedded finance, and evolving open banking. Do you think this uncertainty is going to increase? And how should firms prepare for that?

SPEAKER_01 12:29

I think this uncertainty is 100% got to increase because uh AI, for example, and it's still a bit of an unknown, isn't it? No one really truly understands. And I'll pick an EI specific specifically because I think it's something that's getting a lot of airtime at the moment. Who, you know, who's really in control of that, right? Because firms often think, well, it's the black box and that could have nothing to do with me. But that's not going to be the regulator's view. That uncertainty is going to exist, and I don't think we'll have clarity at all until we start to see, unfortunately, maybe some firms getting it wrong and the regulator putting them right. So I think yes, it's absolutely going to continue because regulation isn't really keeping up quickly.

SPEAKER_00 13:19

Yeah.

SPEAKER_01 13:20

Right? Everything's changing quickly, but the regulating regulator's one step behind the whole time.

SPEAKER_00 13:24

AI is great. It it can lie. It can tell lies.

SPEAKER_01 13:29

Yeah, for sure. It gets it, it gets it wrong. Yeah, absolutely.

SPEAKER_00 13:32

So But the lies look believable on this way.

SPEAKER_01 13:36

This is the thing, right? It kind of you're like, oh, okay, that that sounds great. And I think also, like, I've seen policy documents, for example, a firm's put together, I can absolutely spot 100% that's been done by AI, and that's not being done by an individual. Because things like, you know, it will talk about this, and this is the big risk, because it will talk about regulatory points that are absolutely not relevant. The one thing that AI will tend to talk about, if you're talking about a payments firm, it'll go into all things SMCR. Now we know SMCR doesn't apply yet to payments firm. I'm sure it's coming downwind very, very soon, by the way, but right now it doesn't apply. So if you start talking in a policy about SMFs, SMF 16, 17 and everything else, like it's a key giveaway that to the regulator in particular, you don't even know what you're talking about. You don't know what regulations surround your business and what doesn't. So you've got it's suit you've got to be super careful.

SPEAKER_00 14:33

Finally, if if you could pass the mic to someone else in FinTech who you think's got an interesting perspective on the industry, who do you think we should speak to?

SPEAKER_01 14:44

The people we need to speak to are the people at the coal face, the actual businesses themselves, the people who are at the forefront of innovation. But these are the people that are then having to translate the regulation and they're they're fighting with that and trying to move the business forward. And they're they're the ones you get the real story from.

SPEAKER_00 15:04

Yeah.

SPEAKER_01 15:04

So I think these are people that round the table, I think the the the policymakers really need to listen to.

SPEAKER_00 15:10

Yeah. Well, uh, thanks for joining us, Lorraine, and and for everyone watching. Uh thanks for tuning in.

SPEAKER_01 15:16

Thank you. It's been a pleasure. Thank you very much.