Global menu

Our global pages

Close

Crossing Oceans - a “global” sandbox and the FCA’s deal with the CFTC

Crossing Oceans - a “global” sandbox and the FCA’s deal with the CFTC
  • United Kingdom
  • Financial services
  • Financial services - Digital Financial Services

22-02-2018

The traditional model of regulation

Traditionally, the prudential supervision and continuing financial wellbeing of a financial institution was the responsibility of the financial regulator in that institution’s home state. That or another regulator, where the home state operates a “twin peaks” approach to financial regulation, would be responsible for ensuring that the institution complied with the applicable investor protection laws. Where the institution sought to do business abroad, its “host” state would be responsible for ensuring the institution complied with the host state’s investor protection laws. The institution’s lead home state regulator would remain responsible for its prudential regulation.

While the traditional model has its strengths, it is difficult to parcel risks within a business particularly where new technologies are breaking down geographical boundaries. FinTech challenges traditional business structures and hence the traditional approach to financial regulation, for example decentralised systems built on the blockchain, where it is difficult the determine “where” business is located (as, for example, blockchain nodes may be in multiple jurisdictions). A global approach to Fintech on the part of individual financial regulators, therefore, makes sense and it is in this sprit that the FCA opened its consultation on a “global” sandbox on 14 February 2018.

Less than a week thereafter, the FCA announced on 19 February that it had entered into an arrangement with the US Commodities Futures Trading Commission to collaborate on FinTech innovation. This adds to arrangements already entered into with the Australian Securities and Investments Commission, Monetary Authority of Singapore, Hong Kong Monetary Authority, Financial Services Agency of Japan and the Korean Financial Services Commission. It is an important adjunct to the global sandbox initiative: international co-operation is vital.

The CFTFC arrangement

The FCA announcement describes the cooperation arrangement’s focus on information-sharing regarding FinTech market trends and developments. It also facilitates referrals of FinTech companies interested in entering the others’ market, and sharing information and insight derived from each authority’s relevant sandbox, proof of concept, or innovation competitions. The arrangement, which is the first between a US regulator and the FCA, follows the creation of FCA Innovate in October 2014 and LabCFTC in May 2017.

A sandbox going global 

On 14 February 2018, the FCA announced that it would like to canvass views on the merits of a “global” sandbox, expanding from the current FCA sandbox, which only allows firms to conduct tests in the UK. This marks a clear departure from the traditional model, under which the FCA is, under the Financial Services and Markets Act 2000, solely responsible for business within the United Kingdom.

The new project is an ambitious recognition of the need for regulators globally to work together to better understand and solve common regulatory problems, as well as the fact that many firms which are currently being set up have aspirations to rapidly grow at scale in multiple markets.

There will, however, be difficulties in setting up a truly “global” sandbox. Different countries have different cultural attitudes to what FinTech should achieve, and different regulators have varying risk appetites when deciding the type of entity they will support through a sandbox. These differences of approach are clearly demonstrated, for example, in the Initial Coin Offering (“ICO”) context, where regulators have taken the full spectrum of responses, from promoting such offerings to outright prohibition.

It is interesting, therefore, that one of the questions in the consultation is “Which jurisdictions would be most important to include in a global sandbox?”, which implicitly recognises that “global”, in this context, refers to multiple jurisdictions, but is not a commitment for every jurisdiction in the world to agree. Evolving this concept may, mean that, as a matter of practice, a “global” sandbox would effectively best operate as providing a network through which different regulators can combine on products where they have a mutual understanding, rather than being a requirement that all regulators must agree to treat a particular product in a particular fashion. In this sense, the global sandbox would become a natural extension of the current network cross-border co-operation agreements which regulators have already agreed to, and could form a platform for cross border FinTech regulatory co-operation and information sharing.

The view from Europe

In June 2017, the European Commission proposed a European-wide FinTech sandbox. It called for views on whether the sandbox should target specifically FinTech firms wanting to operate cross-border within Europe, and raises questions on how the sandbox should be operated and regulated. Should the European and FCA global sandboxes be set up, it will be interesting to see how these work together after Brexit.

Further information

The FCA consultation is available at the following link: https://www.fca.org.uk/firms/regulatory-sandbox/global-sandbox. For those interested in replying the consultation closes on 2nd March 2018. Eversheds Sutherlands has a team of regulatory and commercial FinTech specialists. We have helped both start-ups and established firms enter and work in the sandbox. Please contact us if you would like further information.