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With more supervision from the UK’s financial regulator, regulatory risks should be identified sooner, writes Claire Simm, managing director for financial services compliance and Regulation at Kroll.
Image source: Photo by Teona Swift from Pexels
In 2015, the UK’s Financial Conduct Authority (FCA) launched the first fintech sandbox in the world. So far, it’s been a success: according to research by the Bank of International Settlements, with 30 per cent of companies that graduated from the sandbox receiving further venture capital, with the average investment increasing by 6.6 per cent.
In the first half of 2021, we’ve already seen billions of dollars of investment into UK fintech, with 7 in 10 people in the UK using the services of at least one fintech company—one of the highest numbers in the world.
To maintain this momentum, in April FCA CEO Nikhil Rathi announced that the FCA would be launching a “regulatory nursery” to provide additional support to fintech companies and level the playing field for new players. This may sound like good news, but many firms are wondering whether the nursery will be as successful as the sandbox, and what impact it could have on UK fintech.
The reason for the nursery
Graduates from the FCA’s sandbox have cited several key benefits, such as an increase in public confidence in fintech companies and a boost to the UK’s fintech scene. These benefits are bound to encourage more founders to set up fintech companies, further strengthening the sector and offering a wider choice of fintech options to the customer.
However, although the sandbox has been a success so far, participants have provided some clear feedback. In many ways, the sandbox treated companies with long track records in the same way that it treated new companies, meaning that new players could quickly become overwhelmed.
There have also been cases of fintech companies applying with one business model, only to change it once they were authorised. This puts the consumer at risk and essentially defeats the purpose of graduating from a sandbox.
The regulatory nursery aims to fix all those issues: the main goal is to help new players enter the market while maintaining a keen oversight and providing support for a longer time. This will allow the FCA to steer firms in the right direction, ensuring a level playing field and most importantly to the FCA’s strategy, protecting consumers.
Impact on UK fintech
New fintechs are often launched by technology-focused founders, rather than people with financial services or regulatory backgrounds. In practice, this means that many teams are often unprepared when it comes to the challenges of regulation.
Regulatory frameworks are easiest to implement right at the beginning of a company’s journey, but since many founders are inexperienced in this area, they often find themselves having to redesign and undo work in order to implement the right frameworks.
With a regulatory nursery, however, the FCA hopes to provide tech founders with guidance from the beginning. This will allow new companies to expand and grow their business in a more controlled and sustained way. More initial oversight could actually mean less needless work for fintechs and the FCA.
Higher barriers to entry
However, fintech companies will need to commit more resources upfront to support the regulatory frameworks. When interviewing sandbox graduates, many companies admitted they weren’t prepared and had to commit additional resources to hire the right advisors.
Applying and going through a regulatory nursery will likely mean that fintech companies will need to be prepared to spend more capital, time and energy on this initial stage. This could make it more difficult for new fintech companies to enter the market and might result in reduced profitability for new businesses or more expensive products for the end customer.
On the other hand, these barriers could improve and protect the reputation of the industry. Implementing more regulatory oversight may deter unprepared founders or bad faith actors looking to cause a material level of harm.
With more supervision from the FCA, regulatory risks should be identified sooner, and the impact can be mitigated. This will hopefully lead to a more stable industry where consumers are better protected, and fewer resources are spent on correcting mistakes.
Reallocation of resources
Of course, any such programme is only as good as its implementation. The new initiative does raise concerns as to whether the FCA has the resources to actually implement the project and provide ongoing support and supervision in an effective manner.
Overall, the legacy of this initiative will undoubtedly come down to how well it is delivered and how sustainable is it. There are significant potential benefits for fintech firms and the wider industry, as well as for consumers.
A focus on regulation and consumer protection is vital if the UK’s fintech sector wants to continue to grow in relevance and importance. If the FCA can replicate the success of its fintech sandbox, then the launch of the nursery could be another important step on the UK’s journey as a fintech world-leader.
The views and opinions expressed are not necessarily those of AltFi.