R E G U L AT I O N THE FINTECH TIMES
Do you want to play in the sandbox? Evolving tools for innovators in financial services to transform society Lawrence Wintermeyer, Digital Finance Advocate
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ou don’t have to go far back in history to a time when innovators in financial services didn’t have the support of forward looking regulators, such as the UK’s Financial Conduct Authority (FCA), to ‘test’ a new business model or product, and service proof of concept in a safe space, potentially ‘on market’ with real customers. The FCA’s Regulatory Sandbox helped to launch regulatory sandboxes around the world with estimates of 30 now live and more in development. The first generation of UK financial services challengers following Thatcher’s so-called Big Bang in financial markets used the telephone and a world class service proposition to revolutionise insurance (Direct Line, founded in 1985 and funded by Royal Bank of Scotland) and banking (First Direct, formed in 1989 by Midland Bank, now part of HSBC). In the 90s, many building societies demutualised, setting up new subsidiaries for credit card, pensions and insurance product manufacturing and distribution while many mutual life firms demutualised and ‘freed-up estate assets’ for policyholders. The 90s also brought a wave of .com challengers in banking with the likes of Egg Banking (Prudential) and ING Direct (now part of Capital One 360), and a plethora of new brand and product subsidiary launches by institutional incumbents. The most notable winner from this era is Nick Odgen’s
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Worldpay (founded in 1997 and partnered with Natwest, now part of RBS) which heralded the birth of fintech and was recently bought by FIS for $35billion. Many of these initiatives focused on transforming the customer’s experience by providing access to existing or new products and services. The innovation in the legal, governance and operating models in financial services was breathtaking, as was the consolidation of firms coming into the new millennium. During this era, the regulator was not champing at the bit to help your firm with a new and innovative playbook. Regulators and government departments granting approvals, authorisations and licences were very formal, complex and often expensive barriers to overcome to launch new plays – ‘innovative’ would not have been a word used to describe them, ‘bureaucratic’ was more likely. It took the financial crisis and the failure of two large UK high street banks to bring about change. The financial services regulator was reorganised with a ‘conduct’ focus and was given a mandate to promote competition – a great antidote to the financial crisis
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and the concentration of retail and SME banking across the four (large) high street banks. From the early days of the FCA Innovation Hub, led by Anna Wallace and Bob Woodward, a sandbox strategy was developed. This followed recommendation eight of the most excellent report by Sir Mark Walport, the government’s chief science officer, and a team of fintech industry leaders: FinTech Futures: The UK as a World Leader in Financial Technologies, published in 2015. This report was an important part of my playbook as the new CEO of Innovate Finance, the not-for-profit UK fintech members association set up by industry with the encouragement of the UK government. Having come from industry, I surfed the steep learning curve of ‘what is a’ membership/ trade associations, and this report was a brilliant primer to our programme roadmap thinking.
Sandbox collaboration In 2016, Innovate Finance was appointed by the FCA
to lead the Industry Sandbox Consultation, led by the indefatigable Dea Markova, which I had the privilege of chairing. The final report focused on creating a global open environment to collaboratively solve ‘wicked problems’ like fraud, digital identity and financial inclusion. The original mandate sought to create an entity with a delegated (limited) authority to authorise new fintechs under an ‘umbrella’. This was way ahead of its time and we had to descope the delegated authority. The FCA Regulatory Sandbox launched in the summer of 2016 with 69 applications to cohort one and 14 firms awarded participation. The sandbox seeks to provide both
unauthorised and authorised firms a safe space to pilot new innovative products and services on-market with real customers, with constraints and under supervision. From 2016 to date, there have been five cohorts in the FCA Regulatory Sandbox with a total of 375 applications made and 121 accepted into the sandbox programme, an average acceptance rate of 32 per cent. Capital markets projects lead cohort intakes, with an orientation towards distributed ledger technologies. This is followed by payment and insurance related
projects. The sandbox is dominated by earlier stage companies, however, financial institutions have been accepted from the very first cohort. The fifth cohort had six institutional participants in addition to two associations. While the FCA published its (early) lessons learned in 2017, industry learning is not as easy to reference and is more anecdotal and widely distributed across industry participants and stakeholders. What is important to note here is that the regulator is not going to move time and space to get your innovation approved or authorised, but will provide you with the guide
