Industry stakeholders have given a cautious welcome to the Financial Conduct Authority’s proposals for a ‘sandbox’ for providers to play with innovative products and services in, free of the usual regulatory consequences.
Ben Goss, co-founder and chief executive of Distribution Technology, told FTAdviser the sandbox was a positive development, given that concerns over breach of regulation ranked as one of the top inhibitors to delivering digitally supported guidance or advice in a recent survey of their IFA clients.
“While not a ‘safe harbour’, on initial reading it appears to give firms the opportunity to work more closely with the FCA, to get informal guidance and then launch initiatives, in a way which minimises the chances of retrospective actions on the firm and potential consumer detriment.”
FinaMetrica co-founder Paul Resnik applauded the regulator’s move, noting he was not aware of anything similar in any other of the 20 countries his firm operates.
“But our sense is that robo-advice will not advance as it should in the UK until at least two other changes, both regulatory, occur. They are limits to long tail liability for advice and the capacity to offer limited advice.”
He added having recently reviewed dozens of US robo-advisers, FinaMetrica’s conclusion was that most do not have a suitability process that would be deemed ‘fit for purpose’ in the UK.
Nick Hungerford, chief executive at Nutmeg, said his firm was strongly supportive of the sandbox, but admitted that there is still risk of regulatory capture.
“Although we know there is political pressure to develop more innovative financial services in this country, our experience is that the FCA is able to make a distinction between supporting innovation and turning a blind eye to recklessness.
“The implications, hopefully, will be more companies disrupting the incumbents and delivering smarter, faster and more transparent services to a larger market.”
Charlie Nicholls, founding partner at online wealth manager Money On Toast, also said to the regulator’s credit, it is being “very forward thinking” and establishing itself as the most Fintech friendly regulator in the world.
“If delivered well, the sandbox has the potential to increase innovation both among start-ups and more established incumbents within the market. It should propel innovation within the industry to the advantage of both companies and the end consumer.”
Andrew Arwas, UK head of wealth management and banking services at Capco, said theoretically the sandbox should allow both the firm and the FCA to better understand the impact of new products, their intended impact and unintended consequences.
“It will also allow the regulator to better understand emerging commercial trends, rather than be reactive,” he added.
“The key challenge as we see it is to create an environment in which firms can innovate, develop new propositions and break new ground, and have a confident understanding of the additional flexibility that will be afforded to them in the form of non-enforcement.
“The concern would not only be about regulator action taken today, but also retrospective action taken months or years later.
“At the same time, of course, consumers must still benefit from the same level of protection and transparency as the mainstream regulatory regime creates. This is a challenging balance to achieve, but the benefit of getting it right justifies the effort.”
Earlier this week, the FCA gave more detail on its plans to help firms test potential robo-advice offerings and “innovative products” next spring.
The regulatory sandbox will allow businesses to test out new products, services or business models without incurring all the normal consequences, via a new tailored authorisation process.
For already authorised firms, tools such as a virtual or live testing can be used with certain waivers.
To guard against the risk of consumer detriment and risks to market integrity, the FCA will agree on the appropriate safeguards on a case-by-case basis.
It has also suggested solutions to promote industry collectivism, such as setting up an authorised umbrella company that allows innovative businesses to act as its ‘appointed representatives’ for the duration of the trial.
Four potential approaches were outlined in the paper:
Approach 1) As in clinical trials, sandbox firms can only test their new solutions on customers who have given informed consent to be included in testing. Customers are notified of the potential risks and the available compensation.
Approach 2) FCA agrees on a case-by-case basis the disclosure, protection and compensation appropriate to the testing activity.
Approach 3) Customers have the same rights as customers who engage with other authorised firms.
Approach 4) Businesses undertaking sandbox trials are required to compensate any losses (including investment losses) to customers and must demonstrate that they have the resources to do so.
The plans follow an announcement at the FCA’s robo-advice forum event from economic secretary to the Treasury Harriet Baldwin that the government was backing the development of a “safer space” for firms to experiment with ideas for consumers without the full burden of regulation.
Gillian Roche-Saunders, head of venture finance at regulatory consultant Bovill, added that it’s clear that the FCA’s good intentions are hampered by EU legislation.
“In light of that, they will need to use a combination of the options proposed to achieve any tangible benefit. A restricted authorisation, assuming it can be achieved far more quickly than a standard authorisation, will be incredibly valuable.
“The FCA has asked the industry to create a not-for-profit umbrella company that could provide firms with regulatory cover ahead of FCA authorisation. That could be incredibly valuable but given the risk that existing principal firms face when taking on appointed representatives, it may not be an appealing proposition for many.”
peter.walker@ft.com
