There was a time when “light-touch regulation” weren’t dirty words. The idea may now be an anathema, given its association with the financial crisis of 2007, but policymakers have a bad habit of throwing the baby out with the bathwater in such circumstances. Just as it wasn’t appropriate to allow huge systemically important institutions such as banks to self regulate during the years prior to the crisis, it makes no sense today to subject every part of the financial services sector to the same level of scrutiny as the largest institutions.
One of the biggest barriers to entry for new firms seeking to disrupt incumbent financial services players has been the cost of regulatory compliance – this is one reason why so much fintech activity has been concentrated on business areas where authorisation from the FCA is not required.
The FCA’s “regulatory sandbox”
Fintech firms hoping to launch and develop ‘robo-advice’ services are particularly excited by the recent news of the sandbox concept. The idea is that businesses that aren’t currently licensed by the regulator to offer financial services would be able to test new products and services with consumers within this sandbox before launching them fully – and without having to apply for full-on authorisation.
The regulatory balancing act is also being played out in other financial playing fields. For example, there has been anxiety in the UK about the extent to which a US-style algorithm-based advice service, even with human intervention, might contravene suitability regulation – one recent study by FinaMetrica found that dozens of US firms, where the robo-advice model is far more established, would fall foul of these rules were they to be operating in the UK.
This is not to say that fintech innovators here in the UK will be allowed a clear run forever – the idea is not that they should escape the reach of regulators permanently; rather, they will get a breathing space in which to develop new ideas without being strangled at birth by compliance complexities.
Nor will the new ‘sandbox’ system only be aimed at non-authorised firms. Innovation comes from incumbent firms as well as new entrants – to that end, the sandbox regime will also include provisions to enable businesses to test out certain new products and service with the usual regulatory constraints waived for a period.
There will still need to be some protection for consumers and the FCA is consulting on how this might be achieved. It favours negotiating with firms on a case by case basis on issues such as disclosure and compensation for loss, though another possibility is that consumers might have to be asked to give their consent to participation in a trial. However, despite the unanswered questions, this testing bed facility has the potential to be a major boost for the UK’s fintech sector.
Beneficial results for all parties
In the end, everyone stands to benefit from these arrangements. Both new and existing financial services firms will find it easier to innovate if they are less concerned about regulatory hazard. Their customers will benefit from enhanced competition – as well as regulatory protection as unforeseen consequences become apparent during the testing process. The FCA itself, meanwhile, will be under less pressure to constantly amend its regulatory practices to avoid stifling innovation.
The UK appears to be unique in taking this approach. That should help it cement its position as the leading fintech sector in Europe – and enable it to compete even more effectively on the global stage.