The cooperation between the FCA and the CFTC will cover information sharing, referrals and learning from proofs of concept, trials or innovation competitions.
The CFTC and other US regulators have to date eschewed the UK model of establishing a regulatory sandbox, an approach that has been replicated in many other parts of the world.
A proposal for a national regulatory sandbox regime in the US died with the rejection of the Financial Services Innovation Act of 2016 and there does not appear to be the necessary support for reviving that piece of legislation.
However, Ashurst technology lawyer Tara Waters observes that this does not mean the CFTC has not had similar engagement with financial technology companies on a case-by-case basis.
“The CFTC has acknowledged that the FCA has developed the gold standard for engagement with fintech businesses, though, so it remains to be seen whether the CFTC may seek to align its approach to that of the FCA once it has more access to the latter’s learnings,” she says.
“It is also important to note that there are other regulators in the US which are important to the fintech conversation, including the Securities and Exchange Commission (SEC) at the federal level, as well as state regulators.”
Various agencies – including the CFTC, SEC and the Financial Industry Regulatory Authority (Finra) – oversee specific segments of the market, and for a US sandbox regime to be successful there would need to be substantial collaboration and coordination between all of these agencies.
It would also be difficult to successfully implement a federal sandbox regime without the support and collaboration of state regulators, and it is not clear that this support would be forthcoming, says Gina Conheady, corporate and M&A partner at A&L Goodbody.
“For example, when the Office of the Comptroller of the Currency (OCC) introduced a proposal for a special-purpose national bank charter to allow for licensing of fintech companies at federal level (pre-empting state regulation), it encountered sharp criticism and even a lawsuit from state banking regulators, who argued that the OCC had encroached upon state powers,” she explains.
The OCC’s chief innovation officer Beth Knickerbocker says it is considering developing a programme of pilot schemes “that may accomplish the same goals as what others call sandboxes and allow us to foster responsible innovation by OCC-supervised banks and enable participants to obtain feedback early in the development process”.
Information gathered in the pilots could also inform OCC policies and ensure that the regulator is ready to supervise the new activity when implemented on a larger scale.
In January 2017, the OCC created an office of innovation to serve as a central point of contact for innovation-related matters. It participated in more than 50 outreach events related to fintech and responsible innovation last year.
Finra also established an innovation outreach programme in 2017 and is participating in informal monthly meetings between the heads of the fintech-related offices or working groups from the OCC, CFTC and SEC.
“We also collaborate with various other regulatory agencies (such as the US Federal Reserve, the FCA, the Australian Securities and Investments Commission and Ontario Securities Commission) to exchange information and coordinate on key initiatives,” adds a spokesperson.
As is often the case, Canada has taken a different approach to its neighbour. The Canadian Securities Administrators (CSA) introduced its version of a regulatory sandbox a year ago and in September 2017 Quebec’s Autorité des marchés financiers became the world's first regulator to oversee an initial coin offering as part of a sandbox programme.
A spokesperson for the CSA explains that the sandbox was established to jump-start fintech projects that don’t easily fit within the current securities law framework.
Another objective is to gain insight as to whether disruptive innovations – such as blockchain, robo-advisory, online crowdfunding and peer-to-peer lending – are impacting capital markets and to assess the scope and nature of resulting regulatory implications.
The CSA regulatory sandbox reviewed the business models of 22 firms in 2017, granting exemptive relief to three and allowing for the registration or a change in registration of a further five. Of these eight firms, seven were related to cryptocurrencies.The CSA spokesperson notes that this does not mean that the remaining 14 firms were rejected, saying: “In some cases, for example, it was determined that the business model did not fall within securities law requirements and that the firm could operate without requiring a decision from the regulatory sandbox.”