Financial services regulators aren’t renowned for their willingness to be flexible – all the more so following the financial crisis, since when the watchdogs have taken a beating for falling asleep when they were supposed to be on watch. A new proposal from the Financial Conduct Authority that is designed to support innovation is therefore greatly to the organisation’s credit.
Next Spring, the FCA wants to launch a “regulatory sandbox” – the idea would be that companies not currently authorised by the regulator to do business in the financial services sector would be able to test new products and services within this sandbox without have to apply for full-scale licensing. The sandbox would also be open to authorised businesses looking to trial new products that aren’t currently within the scope of their FCA licensing.
This is a potentially valuable initiative given that the cost of compliance and regulation is routinely cited by fintech businesses as the biggest barrier to entry in many parts of the sector. In fact, Britain’s fintech sector is booming – but most of the advances have been made in areas where FCA authorisation isn’t currently required.
The regulator isn’t planning to abandon consumer protection principles altogether but thinks it can implement a proportionate regime that promotes innovation. “We believe that it is feasible for the FCA to reduce some of the existing regulatory barriers to firms that are testing new ideas, while also maintaining suitable safeguards,” a spokesman insists.
The exact detail of how that balance might be achieved has yet to be worked out. The FCA wants to look at each case on its own merits, though it also thinks a more systematic approach might be necessary – requiring companies to obtain consumers’ consent for participating in trials, for example. It also remains to be seen whether consumers would be covered by the Financial Ombudsman Service or the Financial Services Compensation Scheme, in the event of a dispute or a loss.
The other question to be resolved is what happens when a business decides its testing process has proved the case for a more commercial roll-out of the new product or service. For now, the regulator says, “when launching full commercial activity, firms will have to apply to have restrictions lifted in order to carry on relevant regulated activities but they will not have to apply for new authorisation”.
Despite these uncertainties, however, the FCA’s open-minded approach to innovation should ensure that the UK’s fintech sector continues to take the lead.
In fact, the last thing the sector wants is a consumer scandal, which could prove devastating to confidence. This is why, for example, the crowdfunding sector decided early on that it wanted its activities to be brought with the remit of financial regulation – it successfully lobbied regulators and the Government for closer scrutiny.
Nevertheless, financial services entrepreneurs have complained about the time it takes to get clearance from regulators to launch new business ideas – to the detriment of competition in the industry. The FCA’s sandbox can be an important part of the answer to those complaints.
