FX: FCA’s regulatory sandbox draws praise as second cohort begins

By:
Paul Golden
Published on:

The Financial Conduct Authority (FCA) is becoming more bullish about its regulatory sandbox, reiterating that the application of strict rules and the nurturing of innovative products and services are not mutually exclusive.

The FCA has no intention of presiding over a ‘free-for-all’ and that such an approach is not necessary to create a culture of innovation in financial services, according to Christopher Woolard, director of strategy and competition, speaking at an event staged just before the second cohort of companies entered the regulator’s test bed.

Around the same time, Philip Booth, a senior academic fellow at the Institute of Economic Affairs, suggested the guidance for sanctioning innovations to take place outside the normal regulatory framework for financial services led to a situation akin to parents allowing their child to go to university… but only if they follow the child and go and live with them in the halls of residence.

The FCA failed to respond to Euromoney’s requests for information on how many of the participants have applied for full regulatory approval for the services and products tested within the sandbox.

However, feedback from companies going though testing suggests it has given them a notable leg-up.

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Barry McCarthy,
Assure Hedge

Barry McCarthy is CEO of Assure Hedge, which provides automated currency hedging solutions for individuals, businesses and institutions. He describes the sandbox as the quickest route to market for his firm to validate its business model in a controlled, regulated environment.

“The sandbox allowed for a period of 10 weeks [from the date of application] for us to be ready for testing, which was a very tight deadline,” he says. “To meet this we kept a very clear focus on the minimum viable product and ensuring that what was built was in line with regulation.”

Assure Hedge has developed a web interface that allows customers to open accounts, price and trade FX options. The company is raising £3 million to help it gain unrestricted authorizations from the FCA and market its product effectively in the UK.

“Understanding regulation is daunting for any start-up, but the support of the sandbox team helped,” adds McCarthy. “While they can’t tell you the answers to how regulatory tasks should be completed, they pose the right questions and were available on an ongoing basis.

“As such, they bridged the gap for an early stage fintech company to compete on a level playing field with much better-resourced competitors.”

'Unknown knowns'

Payment service provider Paylinko applied for a place in the FCA sandbox because it needed to understand the impact of regulation on its distributed ledger technology, explains CEO and founder Gabriele Musella.

“Having worked closely with Visa and MasterCard, we already knew directives such as PSD2 [Payment Services Directive 2] and GDPR [General Data Protection Regulation] and schemes such as Faster Payments were going to present challenges to our business,” he says.

“With that in mind, having to also deal with the unknown knowns would have represented a big block on our product roadmap.”

Musella says the company has made some minor changes to its product as a result of participating in the sandbox, mostly around the priorities of the modules it plans to deploy.

“It has given us an opportunity to jump from a feature product to a fully specified platform sustaining a multinational business,” he says.

Nivaura, an intelligent digital platform to issue and manage smart financial assets, was one of the first cohort of companies to go through the sandbox and is also participating in the second phase of testing.

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Avtar Sehra, Nivaura

Avtar Sehra, its CEO, says the company was set up to capitalize on a lack of innovation in capital markets, particularly around primary issuance.

Compliance has been of equal importance to technology development. To ensure the alignment of its solution with relevant regulatory rules, the company gained Mifid (Markets in Financial Instruments Directive) and Client Assets and Money approvals, which are restricted as it runs test executions.

“While we could have gained these permissions outside of the sandbox, we now have an environment to push the boundaries on how to leverage our system to structure an instrument but issue and administer it using a blockchain infrastructure,” says Sehra.

Gaining guidance in the sandbox supported the company’s understanding of this emerging space and helped shape its thinking for ongoing commercialization relating to open public blockchains, and issuing securities and other instruments using such a distribution model, he adds.

By working closely with its case officer and gaining direct guidance from the FCA regulatory teams, Nivaura has been able to develop its understanding of the complexities around safeguarding of clients assets and money, and how such rules could apply even in cases where it uses an open public blockchain for clearing, settlement and custody of assets and money.

“Exploring these novel and complex aspects with the FCA helped us quickly build a framework to perform such complex activities on a production basis for the live executions we are doing,” concludes Sehra.

“We have already performed one live issuance and are working on our second. We are also working on production deployments for clients by the end of this year.”