Playing nicely in the regulatory sandbox

The FCA’s much awaited regulatory sandbox will be under close scrutiny

Playing nicely in the regulatory sandbox

The FCA’s much awaited regulatory sandbox will be under close scrutiny from its official launch this week (9th May). As the most recent initiative of Project Innovate, it is a real stake in the ground with regards to the regulatory body’s commitment to promoting effective competition and nurturing the development of innovative business models.


Of course, treading the line between keeping customers safe and encouraging financial innovation is a perennial battle for regulators. The FCA’s decision – the first of its kind amongst global regulators –to reduce some of the barriers to firms that are testing new ideas has been met with both criticism, and praise. And criticism of the praise. This mixed reaction is indicative of the complex role of the regulator, and the mixed emotions it prompts within the industry.


Critics have poured scorn on the ‘love in’ between the government, the FCA and the FinTech industry, suggesting that Innovate Finance’s Alastair Lukie’s vision for “right touch” regulation might in fact be nearer to “light touch” – fearing the troubles we have suffered as a result of that approach in the past. I would argue however, that this relationship is borne from the same ecosystem that has positioned London as one of the world’s leading FinTech hubs. That is, a combination of longstanding financial heritage, a strong talent pool, availability of growth capital – and a supportive policy environment. The sandbox is a great example of how the FCA can provide practical support to emerging companies that goes far beyond the help that any written document or manifesto could deliver.


In my view, the fact that the FCA is willing to flex its traditional approach is testament to the impact that FinTech has had, not just in and of itself, but in driving innovation and forcing a change of mind-set within incumbent organisations and infrastructures. We have already seen this within banks and payment messaging structures such as SWIFT – and even in a regulatory capacity to a degree. The debate around whether challenger banks should be subject to the same capital requirements as the largest high street banks is just one instance of where a rigid, and broad brush approach to regulation has come into question.


We have seen further movement in the regulatory space recently through the creation of the Transatlantic Policy Working Group – the result of a tie up between the UK’s Innovate Finance and US FinTech Firms – and the creation of a ‘FinTech Bridge’ with the Singaporean regulator, MAS. The objective is to ‘advocate on behalf of policies that foster innovation via information sharing and best practices’. Again, we see regulation moving away from the ‘back office’ – a dull but necessary evil – to its position at the forefront of the industry. These governing bodies clutch the orb of innovation in one hand, and the sceptre of control on the other.


As a new and untested initiative, we may find that the sandbox goes through a number of iterations before reaching a model that produces real benefits to the industry. I just hope the FCA is given enough scope to do this. It would be disappointing if this scheme was squashed by critics before being given a real opportunity to take off. We have one of the most dynamic financial regulatory systems in the world in the UK. This latest move by the FCA has attracted global headlines, with some hailing its potential to become the ‘regulator of reference’ on an international stage. Given the right support, I don’t see why this shouldn’t become a reality. The sandbox could become a flagship model that will be invaluable in promoting London as an attractive hub for financial services and tech talent and innovation on a global scale.