How regulatory collaboration transformed markets

Global initiatives to bring fintechs into the regulatory ecosystem are having an enormous positive impact on innovation. Better still, the successes enjoyed to date are set to be just the beginning.

In the decade following the global financial crisis, domestic watchdogs around the world brought in dozens of new rules designed to refine risk-taking, improve compliance oversight and stimulate confidence in global markets.

But for many in the financial industry, regulators became an easy target, criticised for being heavy handed with new regulations.

At the same time, some have attracted praise for their work in developing markets, stimulating innovation and encouraging new market approaches – such is the case with the UK financial regulator’s sandbox initiative.

London’s FinTech ecosystem has benefitted substantially from regulatory backing, allowing innovations across a range of services

London’s FinTech ecosystem has benefitted substantially from regulatory backing, allowing innovations across a range of services


History of the sandbox

Regulatory sandboxes, or “innovation hubs” have emerged as testing grounds for fintechs globally. The sandbox provides a controlled environment for the live testing of new technologies and financial products by both authorised and unauthorised firms, under the supervision of the regulator.

In the UK, the FCA defines its regulatory sandbox as a platform that “allows businesses to test innovative propositions in the market with real consumers.”

The initiative was first introduced in the UK in a report back in November 2015, before initial applications were accepted in June 2016. The impact on the British fintech scene has been considerable.

When it comes to the role that domestic regulators and global standards bodies play in setting minimum service obligations for fintechs, sandboxes have shown that regulation does not have to hinder innovation. In fact, the FCA sandbox approach has shown how a regulatory approach can foster both competition and trust.

One such company to benefit from the FCA’s sandbox initiative is SquareBook, which has devised a new automated way for companies to float on the stock market. SquareBook secured regulatory authorisation from the FCA, having successfully graduated from its sandbox programme in 2018/19.

Founder and chief executive officer Joe Sluys says the proximity with which fintechs are allowed to work with the regulator was certainly a factor in his business’s success.

“The sandbox provides you with a cost-effective, jargon-free route through the process. And trust is therefore built with the regulator, by them being available and open for discussion,” he says.

“The sandbox role is to guide the company through the regulatory process – as a member of a sandbox cohort you receive temporary regulatory authorisation.”

Mr Sluys says that SquareBook paid to be an authorised company but paid nothing to engage with the innovation hub and the sandbox.

“Removing those barriers will create more innovation and enhance competition,” he says, adding that these innovation hub initiatives recognise that better functioning financial markets will benefit all of society.

While the FCA’s sandbox, which runs two six-month-long test periods each year, was not the first of its kind – that was in the US – it has been watched closely by regulators around the world.

Industry bodies like Fintech Scotland are enabling cohesion and progress across innovators, incumbents and government

Industry bodies like Fintech Scotland are enabling cohesion and progress across innovators, incumbents and government


Global appeal

The sandbox model has become so widely appreciated that it is offered in several jurisdictions across Europe and Asia.

“We’ve had quite a lot of conversations with the Dutch regulator, the AFM [Dutch Authority for the Financial Markets],” Mr Sluys explains. “They have a very similar model and have been very helpful so far, on our journey.”

Like the FCA, Singapore has also been widely praised for its regulatory approach in stimulating financial innovation. In November last year, the Monetary Authority of Singapore (MAS) announced a collaboration with consultancy group Deloitte and S&P Global Market Intelligence, to develop a prototype for an industry-wide fintech research platform.

The resulting platform will assist investors and financial institutions in connecting with fintech start-ups that they can partner with or invest in.

MAS also launched the ‘Sandbox Express’ in August 2019, which should provide firms with faster market testing of products and services.

Broad appeal

It would be easy to assume that the appeal of such initiatives is limited to newcomers to financial services, or those for whom the regulatory environment is alien, but it is much broader.

Adam Toms, a former director with Lehman Brothers and Japanese banking group Nomura, is now seeing the emergence of some outstanding talent from the FCA’s sandbox initiative in his role as European CEO of OpenFin.

Mr Toms explains that the sandbox cohorts are noticeably well-structured, with some of these having joined the OpenFin platform after going through the FCA programme. OpenFin, however, did not go through the sandbox itself.

“It is important that the industry recognises what a positive role the FCA has played, not just domestically but globally,” he says.

“One of the big things about innovation, it requires a mindset change across the industry. It requires leadership from all the firms, to encourage innovation inside their organisations. Having a significant regulator, like the FCA, demonstrating top down that they care about innovation is really important.”

These types of regulatory programmes have clearly shown that fintechs and regulators can work together to innovate.

Fiona Ghosh, a partner at Addleshaw Goddard, who specialises in technology disruption and fintech, says the FCA’s sandbox worked well due to a combination of factors.

More recently, the idea of providing a controlled testing environment for start-ups and fintechs has been embraced by the private sector, resulting in increased collaboration between the legacy banks and fintechs.


Standard Chartered is incubating new FinTech ideas through its SCVentures arm

Standard Chartered is incubating new FinTech ideas through its SCVentures arm


Ms Ghosh explains: “I think the predominant purpose of the private sector when it comes to cohorts is not to give regulatory flexibility. It is to see whether an idea is worth investing in further, accelerate the growth of the company by providing it with additional resources… and then working out whether it’s worth acquiring.”

“One thing we see very clearly is that banks and asset managers who operate innovation programmes inside their organisations tend to do better,” Mr Toms says.

He cites the Barclays Rise initiative, which champions fintechs, as an example of “a really strong innovation team and approach”. Barclays Rise has been rolled out across Mumbai, London, New York and Tel Aviv.

The Rise London site was opened in May 2017 and claims to be the largest fintech co-working space in Europe.

While legacy financial institutions and fintechs are keen to be seen to collaborate in many ways, data sharing between the two groups is less prevalent.

“There is room to collaborate in an open manner. Firms will always sit back and protect their IP. But most of the banks we partner with absolutely participate in collaborative initiatives,” Mr Toms explains.

While the sharing of data remains a challenge to organisations, because of recently introduced rulesets such as the General Data Protection Regulation (GDPR) in Europe, the general consensus is that innovation hubs will continue to be the source of new techniques for many years to come.

The challenge now will be refining and expanding the initiatives of the past, to ensure the success and growth of emerging financial companies in the future.