The UK Financial Conduct Authority (FCA) issued a press release on July 3 announcing the latest cohort of firms accepted into its regulatory sandbox. Twenty-nine firms were accepted, which represents the largest cohort to date. The sandbox, now in its fourth year, allows firms to test their products and services in a controlled environment, prior to use in the open market where they would be subject to the full suite of regulations and associated costs.

The United Kingdom is a leader worldwide in supporting growth and innovation in the world of financial technology. Similar efforts are occurring in the United States, but lag behind UK developments; as we reported just three months ago, Arizona became the first state in the United States to enact a law to create a “Fintech Sandbox.”

Focus of cohort

The focus of this year’s UK Fintech Sandbox cohort appears to be on the capital-raising process, with a large number of applicants seeking to increase the efficiency of the process and improve access to capital, including six firms seeking to automate the issuance of debt or equity. Other notable innovations among the UK cohort include the use of distributed ledger technology (over 40% of the cohort), firms offering automated or “robo” investment advice, and the continued increase of firms seeking to use technology to streamline the AML/KYC process.

Crypto-currency/asset based services

Notably, a number of applicants are providing crypto-currency/crypto-asset based services. The FCA, like many regulators, has previously warned consumers of the risks associated with crypto-currencies and crypto-assets. In turn, the FCA has stated that it is keen to explore their use in the controlled environment of the sandbox, so as to determine the potential consumer benefits and inform its policy going forward. This indicates that the FCA remains open to the use of innovative technology, provided that it will benefit consumers and the risks can be managed. In this regard, the United Kingdom is clearly ahead of the United States where, at least at a federal level, regulators such as the US Securities and Exchange Commission have publicly expressed a high degree of wariness about these new digital offerings. (Read our prior posts here, here, and here.)

Global initiatives

The FCA pioneered the concept of a regulatory sandbox in 2014, with a model that has since been followed by a number of other countries, including Australia, Canada, and Singapore, in addition to Arizona, as mentioned above. However, the FCA has acknowledged that the financial services industry is not limited by geography and has spoken of its desire to establish a “global regulatory sandbox”. This would allow firms to test their products under multiple regulatory regimes and better prepare these firms for the open market.

The FCA initiative follows on from the cooperation agreements between the FCA and regulators in Australia, Korea, Ontario, and Singapore. Under these so-called “fintech bridges,” the FCA will assist in facilitating a firm participating in a sandbox in the other jurisdictions where it has participated in the FCA’s sandbox and FCA authorized firms will benefit from an accelerated licensing process in the other jurisdictions.

In sum, there is a clear drive in the United Kingdom to develop a global framework for fintech, facilitating the use of new technologies in a manner that benefits consumers. We will continue to monitor developments in this sector and provide updates as they occur.