In August 2012 when I wrote and published this article explaining why the UK regulator should create an innovation unit it seemed to most people a pipedream at best and laughable at worst. A year ago, under pressure from the Treasury, it was established and dubbed ‘Project Innovate.’
Since then it has “helped 175 firms, five of which have now been authorised to undertake regulated activities.” Now it is to be expanded to create a regulatory sandbox – a safe place to try out new approaches that will open in spring 2016 and be tested with a limited number of firms over the first year they say.
The sandbox will allow unauthorised firms to test out new propositions by granting them authorisation with restrictions, which can later be lifted once the firm is able to meet FCA requirements, while authorised firms will also be able to participate, without recourse to ‘enforcement action letters’, if things are going awry presumably.
The FCA says: “We believe that the benefits that the sandbox can bring to firms should lead to better outcomes for consumers through, for example, an increased range of products and services, reduced cost, and improved access to financial services.
“However, there is potential for customer detriment when innovative financial products or services are tested in real life situations. This risk needs to be carefully managed.” and that its preferred option is for it to agree on disclosure, protection and compensation with firms on a case-by-case basis.
Customers to have to give consent to be included in a trial, or have the right to complain to the Financial Ombudsman Service and Financial Services Compensation Scheme.
The FCA has also suggested that a “virtual sandbox” could be introduced by the industry to enable all firms, whether regulated or not, to test their solutions without entering the real market.
This is a remarkable turnaround from a regulator that little more than two years ago made it crystal clear that there was to be no give or flexibility to accommodate innovation and new entrants and is surely a symptom of the tectonic shifts now happening globally.
It signals the success and expansion of the FCA’s Innovation Unit just as the USA’s regulator the SEC have, three years in, enacted rules to implement equity Crowdfunding for ordinary mortals (unaccredited investors in the USA, non-sophisticated investors in the worse-still UK jargon).
There will be more, much more of this, as regulators eye each other’s moves and governments start to think more deeply about a future based on more openness, new freedoms and innovations that can make the economy more democratic and inclusive.
We already seeing some of the early fruit of this with a raft of new services for consumers and business starting to make an impact and the potential to remove the friction and costs that have been built into the system until now.
This will be as transformative to not just the financial and banking industry, but to the economy as a whole as iTunes and Napster have been to music and Amazon to retail. These are strong signals that this is just the beginning.