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FCA Regulatory Sandbox results, the second cohort and the FSB speech

FCA Regulatory Sandbox results, the second cohort and the FSB speech

  • United Kingdom
  • Financial institutions - Digital Financial Services

15-11-2016

As the appeal of FinTech grows globally, the FCA have announced the results of the first batch of applications to the sandbox, as well as providing advice for firms wishing to join the next batch. In another development, the Financial Stability Board has published a speech regarding the need to remember the financial stability implications of FinTech developments, and reminding regulators of the need to continue to look at both the risks and the benefits of FinTech innovations.

Regulatory sandbox update

The FCA has announced the results of the first batch or “cohort” of applications to the sandbox, which is a “safe space” in which business can test innovative products, services, business models and delivery mechanisms in a live environment without incurring all the normal regulatory consequences of this activity.

Operating in the sandbox provides firms with a range of advantages, for example:

  • being able to obtain guidance regarding how rules are interpreted in the context of the text (complied with which is seen as compliance with the relevant rules);  
  • obtaining waivers to certain FCA rules (if the rule is unduly burdensome or not achieving its purpose); and  
  • obtaining a no enforcement action letter (where justified and the FCA is not able to provide individual guidance or waivers).

The first cohort

In declaring the result of the first cohort of sandbox applications, the FCA has underlined that it is available to large and small firms, as well as authorised and unauthorised businesses and technology businesses supporting financial services. Of the 69 firms that applied to be part of the first cohort, 24 met the eligibility criteria, of which 18 firms are now entering into the testing phase. Testing within the sandbox will be on a short-term and small-scale basis.

The second cohort

In addition to publishing the results of the first cohort of sandbox applications, the FCA has issued guidance for firms wishing to join the second cohort of the sandbox. In particular, the FCA flagged the following as points to consider: 

  • Requirement to have a significant UK presence: if your proposition will require you to be authorised or registered by the FCA, it is likely the FCA will require you to have a significant UK presence, such as a head office.  
  • Securing partners: you may need a partner to be able to test your proposition, in which case you may need to secure contractual agreements with these partners. The FCA cannot itself provide a partner.  
  • Bank accounts: if you need to secure a UK bank account to be able to carry out testing, you need to consider what you will require in this area in your application.  
  • Authorisation application forms: if you require restricted authorisation, then you will need to complete and submit a number of forms as part of your application for authorisation, and, as part of this you should consider which regulated activities might be required for you to test your proposition.

You will have to deal with these issues as part of a successful sandbox application, as well as the criteria set by the FCA generally when assessing sandbox applications:

Sandbox application criteria

Taken from the FCA website

Criteria

Key questions

Positive indicators

Negative indicators

Is the firm in scope?

Is the firm looking to deliver innovation which is either regulated business or supports regulated business in the UK financial services market?

Innovation appears to be intended for the UK market

The firm's relevant activity is regulated by the FCA or is intended for firms regulated by the FCA

Innovation does not appear to be intended for use in the UK

The firm's relevant activity is not within the scope of the FCA's regulatory regime or intended for FCA regulated firms

Is it genuine innovation?

Is the innovation ground-breaking or constitute a significantly different offering in the marketplace?

Desk research produces few or no comparable offerings already established on the market

Internal experts believe that it constitutes a genuinely innovative technology / approach / product or service

Step-change in scale

There are numerous examples of similar offerings already established on the market

Internal expertise believes it is not particularly innovative

It looks like artificial product differentiation

Is there a consumer benefit?

Does the innovation offer a good prospect of identifiable benefit to consumers (either directly or via heightened competition)?

The innovation is likely to lead to a better deal for consumer directly or indirectly, eg through higher quality services or lower prices due to enhanced efficiency

The business has identified any possible consumer risks and proposed mitigation

The innovation will promote effective competition

Likely detrimental impact on consumers, markets or the financial system

It looks designed to circumvent regulatory or fiscal obligations

Is there a need for a sandbox?

Does the business have a genuine need to test the innovation on real customers and in the FCA sandbox?

The innovation does not easily fit the existing regulatory framework, thus making it difficult or costly to get the innovation to market

There is a clear need for a sandbox tool in order to test this product in a live environment

The business has no alternative means of engaging with the FCA or achieving the testing objective

The full authorisation process would be too costly/burdensome for the purposes of a short test of the viability of a particular innovation

Live testing is not necessary to answer the question that the firm is seeking to answer (to achieve the testing objective)

The firm is able to undertake the test easily without the support of the FCA

A dedicated supervisor or the Innovation Hub could answer the query

Is the firm ready for testing?

Is the business ready to test their innovation in a live environment?

Testing plans are well developed with clear objectives, parameters and success criteria

Some testing has been conducted to date

The firm has the tools and resources required to enable testing in the sandbox

The firm has sufficient safeguards in place to protect consumers and is able to provide appropriate redress if required

Unclear objectives for testing and/or plans for testing are underdeveloped

Little to no testing has been conducted on the innovation to date

The firm does not have the required resources available to conduct the sandbox test

The proposed customer safeguards are inadequate and/or appropriate redress cannot be provided by the firm

 

FSB speech on FinTech

The role of the FSB is to coordinate the work of national authorities and international bodies to promote financial stability at a global level. The FSB has published a speech by Svein Andresen, Secretary General of the FSB, which provides some detail its work on FinTech.

The FSB recognises FinTech is a driver of change in the financial system and its importance will inevitably increase. The FSB is monitoring FinTech in terms of both financial stability benefits and risks, in particular as regards which developments are going to change the way financial markets operate. Particular areas of focus include distributed ledger technology, peer to peer lending, and machine learning. The aim is to help policymakers articulate a consistent and well thought out position on FinTech.

The FSB is also undertaking a study of the key elements underlying the broad swath of FinTech innovations and examining the financial stability implications of those elements. This work has identified three elemental promises common to a broad range of FinTech innovations:

  • greater access to and convenience of financial services; 
  • greater efficiency of financial services; and 
  • a push towards a more decentralised financial system, in which FinTech firms may be disintermediating traditional financial institutions.

The FSB notes that these elements have financial stability implications, particularly if the trend toward adoption of FinTech continues. As such, the FSB recommends that authorities be vigilant and actively monitor the effects that FinTech innovations have on specific products and services, as well as on incumbent financial institutions, financial markets, and the economy more broadly. Authorities are also advised to consider how their ability to supervise and regulate the system is affected.

Next steps

Firms can apply for the second cohort of the regulatory sandbox from 21 November 2016 to 19 January 2017. At Eversheds we have a dedicated team advising on sandbox applications, with first-hand experience of helping firms navigate the process. We take a holistic approach, understanding the broader digital financial services landscape at both the UK and European level. For further information, please contact us or see our dedicated digital financial services page.

 

For more information contact

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