FCA Considers Global Fintech Sandbox

Shanny Basar

The Financial Conduct Authority is reviewing whether to extend its regulatory sandbox, which allows new firms to test innovative products with real customers in the live market under controlled conditions, outside the UK.

The UK regulator said in a statement that its sandbox currently only allows firms to conduct tests in the UK but many aspects of financial markets and fintech are global.

“Some firms value being able to work with other regulators to conduct tests in more than one jurisdiction,” added the FCA. “We have also observed, supported and learned from the work of many other jurisdictions in how they promote innovation in financial services.”

The FCA continued that it has signed nine bilateral cooperation agreements with other jurisdictions but does not currently offer the opportunity to participate in a joint sandbox programme with other regulators.

“We therefore want to canvass views on the merits of creating a global sandbox,” added the FCA. “This could potentially allow firms to conduct tests in different jurisdictions at the same time and allow regulators to work together and identify and solve common cross-border regulatory problems, through tests.”

The regulator suggested that global sandbox could focus on problems that cross jurisdictional boundaries, such as innovative solutions to anti-money laundering compliance and payments, and would be more helpful to firms who want to grow at scale in multiple markets.

The sandbox opened for applications in June 2016 and last year the FCA published a report, Regulatory sandbox lessons learned. The report said the sandbox has supported 50 firms from 146 applications across the first two cohorts.

The study said: “Early indications suggest the sandbox is providing the benefits it set out to achieve with evidence of the sandbox enabling new products to be tested, reducing time and cost of getting innovative ideas to market, improving access to finance for innovators, and ensuring appropriate safeguards are built into new products and services.”

In the first two phases of the sandbox, 41 firms tested or were testing a range of propositions in the sandbox when the report was published last October. Around 90% of firms that completed testing in the first cohort were continuing toward a wider market launch and the majority were subsequently fully authorised by the FCA. In addition, at least 40% of firms which completed testing in the first cohort received investment during or following their sandbox tests.

Distributed ledger technology was the most popular initiative across the first two cohorts with 17 firms using DLT technology in some way, the majority being electronic money or payments institutions.

The FCA received 61 submissions for the third phase of the sandbox, 18 met the eligibility criteria and were accepted to develop testing in December last year. The deadline for the applications for the fourth cohort was at end of last month.

Christopher Woolard, FCA

Christopher Woolard, executive director of strategy and competition at the FCA, said in December: “Since we first opened the sandbox, it has supported almost 70 firms in testing innovative new products and services. It is particularly encouraging that we are now seeing more applicants from outside London and a broader range of firms testing in the sandbox.”

Total global investment in fintech remained at $31bn (€25bn) last year, the same as in 2016, according to The Pulse of Fintech – Q4 2017, a study from KPMG.

“Fintech investment is expected to remain strong heading into 2018, with growing investor interest in regulatory technology, artificial intelligence and internet of things enablement,” said KPMG.

Blockchain had a record $512m in venture capital investment last year with use cases being developed around the world. For example, the Australia Stock Exchange announced the replacement of its equity settlements platform with a blockchain-enabled system that is being tested. KPMG said: “The progress of this initiative could become a bellwether as to how blockchain interest and investment will unfold.”

The Canadian Securities Exchange said yesterday that it is introducing a securities clearing and settlement platform that will use blockchain technology. Companies will be able to issue conventional equity and debt through tokenized securities, which would be offered to investors through Security Token Offerings.

“Unlike blockchain-based cryptocurrencies, the STOs will be subject to full regulation by applicable securities commissions,” added the CSE. “The platform is expected to provide major benefits to investors and the Canadian financial services community, including real-time clearing and settlement and substantial cost and error reductions compared to conventional clearing services.”

The CSE intends to file an application to seek approval from Canadian regulators to recognize the new clearing house, which it will operate. The exchange said Kabuni Technologies, a private company based in Vancouver, intends to file for approval to issue tokens to investors through an STO, which would be traded on the exchange’s existing equity trading platform. The CSE has also licensed the necessary technology for the clearing house from New York-based Fundamental Interactions.

Murray Raisbeck, global co-lead, KPMG Fintech, said in a statement: “So much is happening – from the increasing focus on insurtech and blockchain, to the ramifications of maturing companies, such as challenger banks, looking to expand and grow. With regulations changing, particularly in Europe – 2018 will likely be an exciting year.”

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