Playing in the sandbox
The Financial Conduct Authority’s sandbox initiative is well underway, but in 2017, fintech providers may have to come up with something more concrete, lest their consumers lose interest, says Sam Pearse of Pillsbury Law

It has been 12 months since the UK Financial Conduct Authority (FCA) announced it was opening a ‘regulatory sandbox’ to allow businesses to test new products and services in an environment that has lighter regulatory obligations.

The sandbox is intended to bring regulators and innovators together, to promote development and enhance competition. No doubt the FCA hopes it will help it keep up to speed with latest developments and be a more switched on regulator.

The FCA selected a first cohort of 24 firms from 69 applicants, basing its decision on the selection criteria that it had previously published. At the time of launch, the FCA announced that it wanted to support both the established financial services firms and the start-ups. The selection is consistent with that statement as two of the successful applicants for the first cohort were large banks, namely HSBC and Lloyds Banking Group.

There were smaller companies included in the cohort and, overall, there was variety in the areas of fintech being explored, from applications for managing personal finances to borrowing services, insurance, and payment firms basing their products on distributed ledgers.

Many of the businesses are consumer-facing, although there are some technologies aimed at corporates.
At this early stage it is difficult to assess the sandbox. We will not be able to properly measure it against its stated aims until the firms within it have come to the end of their time there, and the outcome of the sandbox will be determined by a number of factors. Chief among them are the quality of the applicants and the reaction of the FCA to the cohorts and their products.

Regarding the first factor, the FCA did spend considerable time creating the entry criteria, and it seemed to have struck the right opening chord. In attracting 69 applicants, the FCA certainly generated interest, and the fact that over a third were accepted was also a signal of intent on the part of the FCA. Indeed, the FCA increased the size of its team to cope with the demand. It has not found the need to amend the eligibility criteria for applicants for the second cohort, and theoretically, that should mean we can expect there to be a similar spread in both the size of the applicants and where on the fintech spectrum they sit.

Once businesses in the sandbox complete their testing, the challenge for the FCA is to react accordingly. The sandbox exists in part to enable those businesses at the fringes of regulation to properly determine which side of the line they fall. If the prevailing regulatory framework is not adequate, the FCA should act. In doing so, the FCA must resist temptation to overregulate and instead remain faithful to striving to promote competition. Overbearing or poorly conceived regulation will be very damaging to the viability of the sandbox and the reputation of the UK as an innovation-friendly jurisdiction.

After a year that has seen considerable debate about fintech, cryptocurrencies and distributed ledger technology, in 2017 the hype and spending is expected to generate genuinely usable products. Banks will continue to develop products on a multiple track; some to reduce compliance costs and increase back-office efficiencies, and others to enhance the customer experience. We should not expect the banks to break the ice into speculative waters. Instead, it may be the smaller businesses placing more adventurous bets with technologies that will grab public attention. That said, it will not be easy to prise consumers away from the established banks. Consumers are still, in the main, loyal to the big institutions. They are not presently sufficiently motivated by a desire to decentralise control, or by a distrust of the banks.

Hopes remain high for a breakthrough in take-up of digital currencies and blockchain-based applications in 2017. However, there is a sense that the pioneers are at risk of losing their audience. The exclusivity of something new creates interest and lends desirability.

That interest quickly wanes if the hot new technology remains impenetrable, with arcane language and opaque explanations of why this is something they should trust and use. We need the innovators to recognise that undertaking a highly sophisticated enterprise is at risk of becoming an academic exercise as the consumer loses interest.

I am not sure that we are that much closer to your average citizen being able to explain the basic differences digital currencies and distributed ledgers. And soon they will not care.
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