FinTech and the FCA Sandbox
The FCA has opened applications to its Regulatory Sandbox, a “safe space” where both incumbent firms and FinTech start-ups can test innovative products without the risk of regulatory reprisals. This kind of platform is a world first. Indeed, Chris Wollard, the FCA’s Director of Strategy and Competition, stated in April that “It is an experiment for all involved and [we] will need to learn as much as the firms engaged in it.”
UPDATE 07/11/2016: The FCA has announced the firms that were successful in their applications to test in the regulatory sandbox. There are a few microsavings players around, as we discussed recently, and we believe many of the innovations are very much relevant to the challenges and opportunities that PSD2 will present. Find out more here.
Innovation in financial services is always going to have to navigate an unavoidably stringent and sophisticated regulatory landscape. It is interesting that much of the hype around FinTech, and especially those start-ups focused on creating and delivering specific financial products (P2P loans or Mortgages for example), is based on the belief that disruptors have the potential to keep their costs down and mitigate some of the regulatory pressures the major financial institutions face. This seems somewhat misguided.
This week Mapa analysts attended a FinTech funding event at the Google Campus, which included a panel discussion between venture capitalists and start-ups. What this revealed is that a major consideration for investors looking at FinTech is whether the management of the company has sufficient skills or experience to manage regulatory issues. Indeed, it seemed clear that they would walk away from great ideas if the management could not display sufficient know-how. This explains why many start-ups look to hire industry experts to their boards after the first funding round.
The Sandbox is about getting innovators engaged with regulatory matters much earlier in their development. It will not necessarily help them get around a lack of skilled or experienced leadership, but it should mean that they can deal with regulatory issues in a more expedient manner and ultimately get to market faster.
It is important to remember that the Sandbox is not just about testing products, as was stated in the white paper in 2015. It will also help prove the resilience of services, business models and delivery mechanisms. Indeed, financial services regulation is about much more than just products: it is about business conduct and organisation as well. Firms should also not think the Sandbox is a ‘golden ticket’ in terms of compliance. Bob Ferguson, the Head of Project Innovate at the FCA, made this very clear when speaking at the Westminster Business Forum in January. He emphasised that access to the Sandbox was not an endorsement of a business model, nor is it about creating a short-cut to compliance.
So, who is going to be using the Sandbox? The application on the FCA’s website states very clearly that those applying to it must be able to prove that “the idea is a genuine innovation” and has “consumer benefits.” The product must also be ready for testing. The scheme is open to unauthorised businesses (but not those looking for a banking licence), authorised businesses looking for more “individual guidance”, and to tech vendors. The first round of applications closes on 8th July and it is expected that there will be two cohorts each year.
Whether the Sandbox will deliver on the FCA’s goals of enabling greater access to market, allowing more products to be tested and ensuring consumer protection, is yet to be seen. At Mapa we are optimistic that it will, and we could not agree more with the FCA’s overall strategic standpoint that “disruptive innovation is a key part of effective competition.”
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