The FCA is about to launch a #FinTech “regulatory sandbox“. There will be two sandbox cohorts a year; and the FCA will accept applications for a place in the first from 9 May 2016. Successful applicants will be able to test their ideas “without immediately incurring all the normal regulatory consequences” of doing so.
#FinTech firms are often required to incur significant FCA-related costs and expenses before they can test their products and services for proof of concept and consumer appetite purposes. This acts as a significant barrier to entry for innovators and entrepreneurs. So the FCA is setting up a tailored authorisation process that will allow sandbox firms to be authorised to test their ideas, but no more.
Sandbox authorisation will be quicker and easier to secure than ordinary authorisation, so time and money will be saved. Sandbox firms may also be able to take advantage of FCA individual guidance; rule waivers and modifications; and “no enforcement action letters” in appropriate cases.
If a sandbox “firm wants to launch itself into full activity on the wider market“, it will still need to apply for full authorisation (and meet the usual threshold conditions); but it will be in a much better position to do so, when the time comes. Result: the cart won’t be in front of the horse quite as often as it is today.
Sandbox applicants must be able to show that their ideas are genuinely innovative; and that consumers will benefit if their ideas are brought to life. Applicants must also be prepared to accept appropriate testing parameters and customer safeguards, which might include a commitment to put the consumer back into the position he would have been in, if a test does not perform as expected. Finally, applicants must be in a position to start live testing quickly.
The regulatory sandbox is innovative: the FCA believes it’s a world first. It’s also a mixed bag. It’s not always necessary for a #FinTech firm to be fully authorised before it can test its products and services; and the FCA can give individual guidance; grant rule waivers and modifications; and issue no enforcement letters, without having to create a sandbox, or invite applicants to play in (or anywhere near) it. The sandbox is also a little curious: the FCA seems to be suggesting that whilst fully informed consent might be appropriate in a pharmaceutical drug-testing context (where an individual’s life and health might be at risk), it’s not appropriate for retail consumers who are (only) putting their money at risk. But the sandbox is still significant. It shows that the FCA is (a) thinking about the needs of #FinTech innovators and entrepreneurs; (b) doing all it reasonably can, within a tight legislative framework, to welcome and encourage innovation; and (c) developing the skills of a team of people who are (presumably) interested in, and want to help, new businesses thrive. It also seems to demonstrate that the FCA is working closely with government on these issues … something which could lead to greater regulatory flexibility and innovation in due course.
There’s more information about the regulatory sandbox in the speech delivered by Christopher Woolard, the FCA’s Director of Strategy and Competition, to the Innovate Finance Global Summit yesterday. The government gave a “FinTech Bridges” commitment on the same day, at the same summit. There’s more information about that here.
UPDATE: since this blog was posted, the FCA has published two relevant documents: (i) the Sandbox Eligibility Criteria (available here); and (ii) the Default Standards for Sandbox Testing Parameters (available here).