Podcasts Other Barefoot Innovation Podcast The Regulatory Sandbox : BMO's Nitish Pandey

The Regulatory Sandbox : BMO's Nitish Pandey

Published: Jan. 16, 2016, 9:57 p.m.

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Welcome to Barefoot innovation as we start into a fresh new year.

Being appreciated!

We are kicking off 2016 with a wonderful guest,\\xa0Nitish\\xa0Pandey of BMO, and also with exciting momentum for Barefoot Innovation. In December, we were named one of the top 9 fintech podcasts by FintechNews Switzerland. We are delighted to be counted among the best in the world, including the Breaking Banks show of my friend Brett King.\\xa0 (If you\\u2019re enjoying Barefoot Innovation, please do consider donating to our efforts to produce it using the button below!)\\xa0

Innovation Nation \\u2013 fintech in the UK

That recognition of our series was especially timely, because I was in London at the time to participate in a roundtable of the U.K.\\u2019s Financial Conduct Authority on the topic of today\\u2019s podcast. The FCA has taken the lead globally in proposing creation of a \\u201cregulatory sandbox\\u201d\\xa0\\u2013 a safe space in which financial innovators can experiment with ideas that might benefit consumers, but that could hit trip wires or raise concerns under today\\u2019s rules.


Americans should focus on this: the U.K. has adopted a national strategy, from its top leaders on down, of becoming the fintech capital of the world.\\xa0 One facet of that strategy is the FCA\\u2019s launch ofProject Innovate, which has \\xa0goals like this one:\\xa0 \\u201cWe promote competition through disruptive innovation \\u2212 innovation that offers new services to customers and challenges existing business models.\\u201d\\xa0 Consider that language \\u2013 the regulator is explicitly \\u201cpromoting\\u2026disruptive innovation.\\u201d


The FCA\\u2019s efforts include creating an Innovation HUB that provides support for promising innovation, and a methodical review of how regulation impacts innovation. Last year they formally requested public input on two crucial questions: what regulations are impeding beneficial innovation, and is there a need for new regulations to foster innovation? While digesting the resulting comments, they put out their proposal on the sandbox concept. They\\u2019ve been sharing these ideas globally and exploring very creative approaches, like whether it would make sense to create a \\u201cvirtual sandbox\\u201d in which innovators could test certain ideas through shared data, without exposing real consumers to any risk at all.


Lawrence Wintermeyer of Innovate Finance, speaking at the FCA\\u2019s December sandbox roundtable, cited growing excitement around both \\u201cfintech\\u201d and \\u201cregtech.\\u201d He argued that London has the \\u201ctech\\u201d of the U.S. west coast, the \\u201cfin\\u201d of New York, and the \\u201creg\\u201d of Washington \\u2013 all clustered in one city where everyone can get together by public transport in fifteen minutes. The U.K. has other innovation advantages over the U.S., including a more concentrated banking system and a much simpler regulatory structure.\\xa0 Startups are also attracted by the ability to \\u201cpassport\\u201d UK activities throughout the European Union, offering easy access to large markets. All this contrasts sharply with the U.S. model in which innovators seeking national scale must undertake the complex process of securing either a bank charter or 50 state licenses, or both. Still, part of London\\u2019s innovation success clearly stems from deciding to value the upside promise of innovation, in addition to policing the very real downside risk. The FCA\\u2019s efforts include a conscious effort to be nimble \\u2013 something that does not come easily to any regulatory system. The resulting vibrancy is palpable.


On this side of the Atlantic


In the U.S., the same thinking is gaining traction. Comptroller of the Currency Tom Curry has appointed anew task force for Responsible Innovation, as we discussed in our recent episode with him. The CFPB has its Project Catalyst innovation lab, and the Federal Reserve Bank of San Francisco held a conference last fall on the \\u201c(R)evolution Underway\\u201d in financial services, addressing \\u201chow technological changes are presenting opportunities and challenges for financial institutions while compelling regulatory agencies to think about how innovation impacts the supervisory process.\\u201d

These U.S. discussions increasingly include exploration of creating a regulatory sandbox \\u2013 which brings me to our guest for this episode.

Nitish\\xa0Pandey is Senior Vice-President & Chief Legal Officer, U.S. Personal & Commercial Banking, for BMO Financial Group of BMO Harris. He believes our financial ecosystem needs a safe sandbox in which to innovate (as did Jesse McWaters and Rob Galaski in our episode on the \\u201cSecrets of Fintech\\u201d).

Nitish\\xa0and I started discussing the sandbox concept last summer (before the U.K.\\u2019s proposal). I\\u2019d convened a roundtable on disruption of consumer finance and how to (and not to) regulate it.\\xa0Nitish, whom I\\u2019ve known for years, came to the meeting armed with the most specific blueprint I had seen on these ideas. In the months since then, he\\u2019s refined it and shared it publically several times.

The goal of a sandbox approach is to allow testing of pro-consumer innovation, while assuring that customers are still well-protected.\\xa0 The issue has endless subtopics. For instance, is a sandbox really needed? How do current rules impede innovation -- if they do \\u2013 and which ones are most problematic? Is it appropriate to use the concept of \\u201crisk tolerance\\u201d in consumer protection?\\xa0 If so, can risks be defined? Can they be quantified and measured?

And, if a sandbox would help, how should it be designed? Do regulators have the legal power to waive or suspend rules to allow experimentation and if not, should they? What standards should innovators have to meet? How would experiments be time-limited? What standards should be used to permit them, and to judge their success? If new ideas prove out, should they be publicized? Should the whole market be allowed to adopt them? If so, would this require extensive rewriting of current rules? Will innovators have sufficient incentive to enter the sandbox, if competitors can simply adopt the ideas they pilot (in contrast to, say, government approval of new drugs after testing that ultimately produce patents)?\\xa0 How can innovators protect their confidential intellectual property?\\xa0 Would agency pre-review of sandbox proposals bog innovation down in bureaucracy, defeating the purpose of the whole exercise?

And perhaps most importantly, how should consumers in a sandbox be protected? What limits should be placed on potential harm to them? Should they be compensated for any harm and if so, how? What disclosures should they receive? Should they have to give consent? How would harm be quantified?

While Nitish\\xa0doesn\\u2019t try to answer all of these questions, he tackles many of the hardest ones. And he pinpoints a core issue that\\u2019s widely underestimated. The problem is not just rigid and potentially counterproductive regulatory requirements. It\\u2019s also the sheer cost and effort of implementing full-scope compliance for virtually any change.\\xa0 If businesses can\\u2019t inexpensively test how customers would respond to an innovation, they won\\u2019t offer it. And they can\\u2019t test real-life response to new ideas today, without also building out massive compliance machinery \\u2013\\xa0Nitish\\xa0calls it the \\u201cpipes\\u201d \\u2013 affecting nearly every function of the company. We\\u2019re in a \\u201cLean Startup\\u201d world today where innovators grow by designing and refining a minimum viable product (MVP) through quick, intensive consumer interaction. Traditional companies can\\u2019t do this well, partly because their compliance systems weigh them down.

Nitish\\xa0has ideas how to design and execute a practical solution for this \\u2013 without going bureaucrazy!

Compliance as innovator?

While I had Nitish\\xa0with me, I also took the chance to have him share his advice on the revolution underway in the compliance function. He is the first bank compliance manager we\\u2019ve had as a guest, and a visionary in the field.

He believes, as I do, that consumer financial protection is migrating from a rules-based system to an increasingly principles-based one. That shift is bringing permanent uncertainty which, in turn, requires deeply remaking the compliance management model. \\u201cIt used to be, if you knew your regulations, you were fine,\\u201d he says in our discussion, whereas today\\u2019s compliance manager is a \\u201ctrue risk management professional who can be creative in the process and demonstrate excellent judgment as we rapidly move into an increasingly gray world.\\u201d He lays out the new role of compliance in today\\u2019s bank, why it\\u2019s needed, the key changes required, and how to make it happen.

Nitish\\u2019s insight derives partly from his broad background. He has undergraduate and postgraduate qualifications in Law, Economics and Management in his native Australia and has held positions ranging from marketing to nearly every facet of risk management. He spent a decade at American Express in Compliance, Risk Management and Operations, focusing on consumer, small business and commercial portfolios. He was Deputy Chief Compliance Officer for American Express Centurion Bank, responsible for the oversight and implementation of the bank\\u2019s Compliance Program. In November 2014 he joined BMO as Chief Compliance Officer (CCO) for U.S. Personal and Commercial Banking.

I hope you enjoy my talk with him as much as I did!

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