A senior figure at the Financial Conduct Authority (FCA) has explained how its long-discussed regulatory ‘sandbox’ for fintech firms will actually work.
As The Treasurer reported in March, the scheme was first described as a monitored amnesty, under which new firms – or new ventures from established brands – would be able to test the effectiveness of innovative ideas and approaches.
Speaking at the Innovate Finance Global Summit on 11 April, FCA director of strategy Christopher Woolard said: “The key question for us was, how does a regulator create a sandbox that gives industry the freedom to break new ground and encourage creative solutions when there is a limited public appetite to accept business failure if things go wrong – particularly in financial services?”
The answer, he revealed, was that a ‘tailored authorisation process’ would form the core of the amnesty – enabling business managers to focus on experimenting with, and trialling the effectiveness of, their novel initiatives, while ensuring that the market impact of those models is strictly limited.
Firms looking to participate in the sandbox, Woolard noted, would “still need to apply for authorisation and meet threshold conditions” – but critically, only for the limited purposes of the sandbox.
With that in mind, Woolard said, “the authorisation tests should be easier to meet”, while the costs and time to get conceptual trials up and running would be far lower than if participants were to seek full regulatory approval.
He added: “If, after sandbox testing, the firm wants to launch itself into full activity on the wider market, it can do so if it satisfies the threshold conditions for that wider activity. We think this strikes the right balance – regulation that starts in proportion to the scale of the concept being tested, and can grow with the ambition of the full business model.”
Woolard mentioned that the FCA considered the feasibility of removing authorisation requirements for sandbox firms altogether. However, he said, “Legally, there are some restrictions that limit our ability to do this. But, more importantly, we concluded that sandbox firms undertaking regulated activities should sit within our regulatory perimeter so we can ensure that consumers are protected.”
In addition, he said, “For the firms in the sandbox, our approach also means they should be ready to operate in the regulatory framework after the sandbox. And as we have seen with many markets, consumers are more likely to have confidence in a new product if it is within the regulatory framework.”
Even with those measures in place, though, Woolard cautioned: “As well as significant potential benefits, [the scheme] comes with risks. In many ways, it won’t just be the firms that are learning in the sandbox – we will be, too.
“But the prize is there. If, between us, we can get this right, the sandbox can play a hugely important part in helping firms get new and exciting ideas to market more quickly.”