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
Please click here to view table.
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.
Firms can apply for the second cohort of the regulatory sandbox from 21 November 2016 to 19 January 2017.