This is more or less how Matthew Vincent of the Financial Times recently summarised the conclusions of PA Consulting's and TheCityUK's report that assesses how the UK Financial Conduct Authority's innovative regulatory sandbox has developed and suggests how it should grow up from here.
For readers unfamiliar with the FCA's regulatory sandbox, it was launched in 2015 to allow financial services and fintech businesses to test innovative propositions in the market, with real consumers, all under the supportive but watchful gaze of the FCA.
From the FCA's website:
"The sandbox seeks to provide firms with:
- the ability to test products and services in a controlled environment
- reduced time-to-market at potentially lower cost
- support in identifying appropriate consumer protection safeguards to build into new products and services
- better access to finance
The sandbox provides access to regulatory expertise and a set of tools to facilitate testing. The tools include restricted authorisation, individual guidance, informal steers, waivers and no enforcement action letters": https://www.fca.org.uk/firms/innovation/regulatory-sandbox
The PA Consulting and TheCityUK suggestions are set out in Enhancing the UK's Approach to Innovation: https://www.paconsulting.com/insights/2020/enhancing-the-uks-approach-to-innovation/. It's worth reading.
The report acknowledges just how innovative and fintech-friendly the FCA has been, and how much its approach has helped London become a world-class centre of financial innovation. London is, after all, one of the world's top five fintech hubs. But, to take support for financial innovation to higher levels and to help the UK achieve still more as a fintech centre, it asks the FCA to:
- help fintechs better to understand UK financial services regulation, particularly the different paths to authorisation. This would include improving accessibility to, and the clarity of, regulatory materials as well as creating a forum for "sandbox alumni" fintechs to share their experience with younger players.
- create a broader set of regulatory ratings or accreditations, recognising that the current "one-size" sandbox doesn't fit all fintechs and is too narrow in its approach and outcomes. Apparently, the FCA acknowledges that some entrants to fintech are actually big and mid-size companies, so that the current sandbox doesn't suit them or their needs. Such a set of ratings or accreditations could help grown-up financial firms and consumers better understand fintechs' regulatory status, open up the market in B2B financial services, and help to secure greater access to funding
- create a digital sandbox in partnership with industry, which would provide access to data and enable other regulators and industry players to observe and play in the sandbox, using "off-market" test conditions to understand the innovation being offered
- help UK financial services regulatory staff understand better the fintech world and its new business models, especially in the context of data use and data science, so that front-line regulators "get" innovation and new business models in carrying out their functions
- strengthen support for UK fintechs in exporting their business models, products and services to overseas markets, by helping UK fintechs to understand the key cultural, legal, regulatory and tax features of the most promising overseas jurisdictions, and by leveraging the FCA's relationships with their regulatory counterparts to introduce promising UK fintechs to those regulators.
The FT's Matthew Vincent reports that, so far, the FCA has taken the report well.
But the regulator has a few things on the go right now. It is grappling with the impact of COVID-19 on the UK financial services sector and its customers, and managing aspects of the Treasury's financial support for business during the pandemic. Then there is the question of the UK's financial services regulatory post-Brexit future. And of course the FCA's business-as-usual themes and workload remain. So the FCA's new CEO, Nikhil Rathi, will no doubt hit the ground running. Amidst all of that, UK fintech has a bright past and present and an even brighter future. Perhaps the FCA won't adopt all the report's recommendations, and, with those other distractions, timing may prove challenging. But, whatever else the FCA is up to, it seems likely that it will rise to the challenge - so that UK fintech regulation will grow up nicely.
"The UK's regulatory sandbox approach has been hugely successful...but is starting to show limitations as the sector grows and matures...A broader framework needs to be developed with industry to reflect the expansion of the fintech sector and ongoing regulatory development of maturing firms." Miles Celic, CEO, TheCityUK