FCA selects first firms to participate in regulatory sandbox testing and new advice unit

Out-Law News | 23 Sep 2016 | 4:45 pm | 3 min. read

The UK's Financial Conduct Authority (FCA) has selected 24 businesses to "test new ideas without incurring all of the normal regulatory consequences" under its regulatory sandbox initiative, it has announced. 

The first businesses to participate in the scheme include companies based in Singapore, Denmark, USA and Canada, as well as the UK, FCA director of strategy and competition Christopher Woolard confirmed. The businesses selected all had to adhere to criteria set by the FCA to be eligible to participate in the sandbox testing.

The FCA has previously said that some testing under the scheme could involve real world experimentation of innovative products, services, business models and mechanisms of delivery under a light-touch regulatory framework and tightly controlled conditions.

Final details of the testing and the timelines involved for firms, as well as the consumer safeguards they will be subject to, have still to be set, Woolard said.

Woolard said 69 businesses in total had applied to take part in the FCA's scheme. The 24 successful applicants are active in a range of different areas, including banking, insurance, financial advice, profiling and digital identity, as well as disclosure, he said.

Seven businesses in the payments market, including some which are exploring how blockchain might be used, will also participate in the testing. Woolard said the FCA does not view blockchain, or distributed ledger technology (DLT) as a "panacea" but said it does see the potential it has to "offer genuinely innovative solutions to financial services".

"DLT presents real opportunities in the regulatory space," Woolard said. "Opportunities such as helping firms meet 'know your customer' or anti-money laundering requirements more efficiently. But there are a number of issues to be considered. For example, how do individuals gain access to a distributed network and who controls this process? What data security exists for users? We are engaged in discussions with government and industry on these issues."

"As with all new technology, the development of DLT will be an iterative process. Our current thinking around what it can do will undoubtedly adapt and change as research and experimentation continues. So we will continue to monitor development of this technology, while remaining alive to any future risks it may pose," he said.

Hong Kong and Singapore are among the other financial centres to announce plans for a regulatory sandbox since the FCA outlined its world leading plans for its sandbox in November last year.

In his speech, Woolard also announced that nine businesses will obtain support from a new 'advice unit' that has been set up by the FCA.

The unit was established in response to a recommendation contained in the Financial Advice Market Review published earlier this year and will provide support and advice on regulatory issues to new and established financial firms seeking to introduce innovative products and services to the financial advice market.

The FCA previously said the advice unit has been explicitly tasked with supporting firms looking to develop low-cost, automated advice, also known as robo advice, to fill gaps in the current market.

Woolard said: "We can announce that nine firms were successful out of the 19 applications we reviewed in the initial tranche. And of these nine firms, eight are established financial services, who want to bring automated advice to the market at scale."

"Firms who were not successful have received feedback to help them understand why they did not meet our eligibility criteria, and have the option to reapply when we open our next cohort. The nine successful firms have begun the process of engaging with the Advice Unit, who will seek to provide regulatory feedback on the automated advice models they are developing," he said.

The FCA intends to share what it learns from the interactions between the advice unit and firms and expects to publish materials stemming from that work in early 2017 with the aim of providing "greater clarity to the industry on how to take an automated advice model forward".

The regulatory sandbox and advice unit are separate schemes that make up part of the FCA's overall Project Innovate initiative.

More than 300 companies have been supported by the FCA through Project Innovate since it launched in 2014, Woolard said. He encouraged big banks and insurers, and not just financial technology (fintech) start-ups, to engage with the scheme.

"Project Innovate is about working with incumbent firms to develop new innovative ideas as much as it is providing support to start-ups," Woolard said. "If there are specific challenges incumbent firms face when it comes to competition and innovation, we would like to hear about them to inform our future activity."