By Mike Faden
"Finance is a truly global sector," said Christopher Woolard, the FCA Executive Director of Strategy and Competition, in a March 2018 speech. "Increasingly we're hearing from firms a demand to operate globally, to grow at real scale and pace. This would involve working with other regulators across the globe to conduct tests at the same time."2
In addition, regulators in the U.S., U.K., and other countries have signed more than 30 bilateral cooperation agreements over the past two years to share information that may help facilitate regulatory approvals in each country.3
A fintech regulatory sandbox is a framework created by a financial regulator to allow small-scale, live testing of new financial services with some regulatory supervision, but without undergoing a full licensing process.4 The goal is to enable companies to innovate faster at lower cost within a highly regulated industry, while ensuring adequate consumer protections.5
The U.K. is generally regarded as the first country to have introduced a fintech regulatory sandbox, coining the term in 2015.6 The FCA accepts "cohorts" of new products for limited-period testing, based on criteria such as whether the product is genuinely innovative and offers benefits to the public.7 The agency says that 90 percent of the first cohort in 2016 subsequently introduced those products to the broader market, and that participating in the fintech regulatory sandbox made it easier for many companies to get funding.8 Nearly 70 companies have been through the process to date; the FCA received 61 applications for inclusion in the latest cohort and accepted 18 of them, including blockchain-based cross-border payment services, insurance products, anti-money-laundering controls, and biometric digital ID products.9
Following the apparent success of the U.K. approach, other countries have launched fintech regulatory sandboxes to spur fintech innovation. They include Australia, Canada, Hong Kong, Singapore, and South Korea.10,11 The approach is also being considered in other countries, including China.12 These national programs differ based on the local market and regulatory environment: for example, South Korea's sandbox focuses on the design and monitoring of robo-advisors due to the fast-growing wealth management industry, according to an EY analysis.13
In the U.S., two government fintech innovation initiatives are the Consumer Financial Protection Bureau's Project Catalyst, which works with fintechs to help bring new consumer services to market; and LabCFTC, formed in 2017 by the Commodity Futures Trading Commission (CTFC) to encourage and engage with fintechs.14,15
The FCA says that during roughly two years of operating the U.K. fintech regulatory sandbox, it has realized that fintech startups may need to operate globally, even during their exploratory stages. "Through the sandbox we've seen 30 applications from international firms and have gone on to support 11 of them – many of which are also in other countries' innovation programs. It's clear which way the wind is blowing," said FCA's Woolard.16
Accordingly, in February 2018 the FCA proposed the development of a global fintech regulatory sandbox that could let firms conduct tests in different jurisdictions at the same time, while allowing regulators from different countries to work together.
According to Woolard, the potential of such a project is huge – from solving global problems like money laundering to reducing the regulatory burden of compliance. The U.K. estimates that money laundering totals $1.6 trillion worldwide and is an inherently international problem; controls cannot be effective if there's fragmentation, Woolard said.17
The FCA solicited stakeholders to provide their views about what a global fintech regulatory sandbox should look like. According to Woolard, the FCA received responses from a wide variety of interested parties, including regulators, startups, large firms, trade bodies and think tanks. Those responses demonstrated considerable interest in cross-border testing, which the FCA says could reduce cost and complexity for fintechs and accelerate their international expansion.
The U.S. featured prominently among the countries and regions that respondents wanted to see included in the fintech regulatory sandbox, Woolard said, with South America, Australia, Hong Kong, Singapore, and Europe also listed. Suggestions for how the sandbox might work ranged from a global dictionary of the data required across different countries to a joint statement from regulators about criteria and consumer safeguards. The project might be overseen by a consortium of regulators from different countries.18
However, "establishing a global sandbox is an immense undertaking and we have to be realistic about the task at hand," Woolard said. For example, an approach based on establishing global standards might be too slow for the fast-moving fintech industry, he said. The effort should work with international bodies where possible, and it makes sense to start with jurisdictions that already have established sandboxes or innovation hubs. The model should allow room to experiment with different approaches, such as allowing simultaneous tests in several countries or using a single test in one country to collect data for multiple regulators.
The sandbox also has to be a collaborative effort, Woolard said. "This has to be a joint effort across international regulators, not a U.K. global sandbox." Accordingly, the FCA planned to start work on a blueprint in March with interested regulators across Europe, the U.S., and Far East. "So there's real momentum behind this and we hope that before long the ambition of a global sandbox will be a reality."
Over the past two years, regulators in different countries have also established less-ambitious bilateral initiatives aimed at fostering fintech innovation. These agreements represent the first steps taken by regulators to establish formal agreements aimed at facilitating cooperation around fintech innovation, according to a blog post by Columbia Law School academics.19 Agreements typically focus on sharing market trends and information; some also deal with fintech referrals.
Experts say there are currently more than 30 such agreements involving regulators in countries including the U.S., U.K., Australia, Singapore, Hong Kong, and Canada.20 The FCA alone has signed eight agreements, including one with LabCTFC in February 2018 to share information on fintech market trends and developments. The agreement also facilitates referrals by each country of companies interested in entering the other country's market, and sharing information and insight derived from sources such as sandboxes and innovation competitions.21
Still, experts say, it is too early to tell whether these agreements are effective, due in part to a lack of public information about how widely they are being used by businesses.22
Responding to the increasingly global nature of fintech innovation, financial regulators are working on collaborative initiatives to support the introduction of innovative products across multiple countries while potentially also tackling international financial challenges. Among these initiatives is an ambitious global fintech regulatory sandbox designed to speed fintech innovation by making it easier for companies to test new products simultaneously in several countries.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. “Regulating innovation: a global enterprise,” Financial Conduct Authority; https://www.fca.org.uk/news/speeches/regulating-innovation-global-enterprise
3. “Cross-Border Cooperation in Financial Regulation: Crossing the Fintech Bridge,” Columbia Law School Blue Sky Blog; http://clsbluesky.law.columbia.edu/2018/02/13/cross-border-cooperation-in-financial-regulation-crossing-the-fintech-bridge/
4. Regulatory Sandboxes and Financial Inclusion, The Consultative Group to Assist the Poor; http://www.cgap.org/sites/default/files/Working-Paper-Regulatory-Sandboxes-Oct-2017.pdf
5. “FCA reveals next round of successful firms in its regulatory sandbox,” Financial Conduct Authority; https://www.fca.org.uk/news/press-releases/fca-reveals-next-round-successful-firms-its-regulatory-sandbox
6. “Regulatory sandbox,” FCA; https://www.fca.org.uk/firms/regulatory-sandbox
7. “Sandbox innovation,” Deutsche Bank; http://cib.db.com/insights-and-initiatives/flow/Sandbox_innovation.htm
8. “Regulating innovation: a global enterprise,” Financial Conduct Authority; https://www.fca.org.uk/news/speeches/regulating-innovation-global-enterprise
9. “FCA reveals next round of successful firms in its regulatory sandbox,” Financial Conduct Authority; https://www.fca.org.uk/news/press-releases/fca-reveals-next-round-successful-firms-its-regulatory-sandbox
10. “Plenty of chatter, and even some action, as Hong Kong makes progress on fintech,” South China Morning Post; http://www.scmp.com/tech/start-ups/article/2100298/plenty-chatter-and-even-some-action-hong-kong-makes-progress-fintech
11. “Canada's securities regulators launch fintech 'sandbox’,” Reuters; https://www.reuters.com/article/canada-regulator-idUSL1N1G81U2
12. “Central Bank Official Calls for Space to Test Fintech,” Caixin; https://www.caixinglobal.com/2017-11-24/central-bank-official-calls-for-space-to-test-fintech-101175612.html
13. As FinTech evolves, can financial services innovation be compliant?, EY; http://www.ey.com/Publication/vwLUAssets/ey-the-emergence-and-impact-of-regulatory-sandboxes-in-uk-and-across-apac/$FILE/ey-the-emergence-and-impact-of-regulatory-sandboxes-in-uk-and-across-apac.pdf
14. “Project Catalyst,” Consumer Financial Protection Bureau; https://www.consumerfinance.gov/about-us/project-catalyst/
15. “LabCTFC Overview,” U.S. Commodity Futures Trading Commission; https://www.cftc.gov/LabCFTC/Overview/index.htm
16. “Regulating innovation: a global enterprise,” Financial Conduct Authority; https://www.fca.org.uk/news/speeches/regulating-innovation-global-enterprise
19. “Cross-Border Cooperation in Financial Regulation: Crossing the Fintech Bridge,” Columbia Law School Blue Sky Blog; http://clsbluesky.law.columbia.edu/2018/02/13/cross-border-cooperation-in-financial-regulation-crossing-the-fintech-bridge/
21. “US CFTC and UK FCA Sign Arrangement to Collaborate on FinTech Innovation,” U.S. Commodity Futures Trading Commission; https://www.cftc.gov/PressRoom/PressReleases/pr7698-18