The report Industry Sandboxes: A development in Open Collaboration published today is itself the product of industry-wide collaboration – initiated by an invitation from the UK's Financial Conduct Authority (FCA) to Innovate Finance to chair a consultation on an industry-led sandbox, the journey to this point has been fascinating. As part of the Steering Committee for the Consultation, I have been privileged to have had an inside view of the willingness from across the industry and across the globe to engage with the concept of an industry-led sandbox.
Although sandboxes are a well-established testing mechanism within the tech community, the concept of using a sandbox for financial services innovation is relatively new – the FCA led the way with its first-of-a-kind regulatory sandbox last year and we understand that there are already sixteen jurisdictions following suit. For this industry, deepening understanding of the value of an industry-led sandbox has been a key part of the journey. The breadth of engagement itself has led to the conclusion that the appetite is not just for a single recipe for a single industry-led sandbox but for the range of insights which can help set the scene for multiple potential industry sandboxes.
In a highly-regulated industry such as financial services, understanding the regulatory context, and the optimum legal structures for securing funding, is vital to enable innovation to deliver viable and valuable solutions. From a legal and regulatory perspective, this is an area where an Industry Sandbox could have a very useful role to play and benefit could derive from professional advisors' engagement with it.
For many FinTech start-ups, their in-house resources are often limited and focussed on proving the technical and commercial imperatives of their solution so greater support is needed in navigating how it will fit into the regulatory context. Our experience from advising on a range of FinTech solutions across the ecosystem and developing our Regulatory Accelerator has shown that, whilst some solutions will have unique characteristics which will need individual analysis, there are ways to streamline the delivery of advice needed on preliminary questions more commonly raised by start-ups. For incumbents, even with large legal teams, there could be benefits from shared industry and regulatory insights on how FinTech innovations could fit into the regulatory landscape. By participating in an Industry Sandbox, professional services firms can gain understanding of the commercial and technical objectives which helps hone advice as well as increase their engagement with the FinTech community.
An Industry Sandbox could also support regulators in delivering their regulatory policy objectives and shaping regulatory guidance by giving early sight of innovations which could deliver consumer benefit or indeed create operational efficiencies for regulators, perhaps through streamlining reporting or analysis. Observations by regulators shared in an Industry Sandbox could potentially reduce strain on their direct support functions, as well as support professional services firms in guiding their clients on areas reliant on interpretation of how guidelines would apply to new developments. Early engagement with potential FinTech solutions by professional services firms could also help to highlight where a solution may fit with regulatory policy objectives but would conflict with current regulatory guidelines and encourage dialogue with regulators to evaluate potential for removing technical obstacles.
Collaboration is increasingly a characteristic of the FinTech ecosystem and an Industry Sandbox could establish a forum for creating mechanisms to reduce legal friction, such as agreed-form NDAs or other standard forms of engagement.
Constructing a successful Industry Sandbox would begin with designing a legal and governance framework which enables participants to collaborate to deliver agreed objectives, with a robust matrix of carefully balanced rights designed to allow it to evolve. In doing that we would be following a path well-trodden in today's financial services environment in which consortia play an increasing role, but by introducing an Industry Sandbox the industry itself will be innovating in collaboration by creating a new mechanism to foster its success.
There is clear appetite from the industry for engagement by regulators, domestic and globally, typically in an observer capacity and with an Industry Sandbox potentially creating a forum for supporting the development of solutions which are compliant across borders or streamlining preparations for regulatory authorisation processes. Comment at the Industry Sandbox workshop at the Innovate Finance Global Summit 2017 (click here for our blog) indicated that regulators from other FinTech hubs see value in this too.
This report provides views on potential use cases from across the FinTech ecosystem, as well as insights on sandbox design principles and components. Together they can support industry in making the implementation choices needed to take forward specific proposals for one or more Industry Sandboxes.
The stepping stones are set out. The choice of direction now lies with the industry to determine.
