It is time for some innovative thinking. From 9 May, the regulator will be opening up the floor for some original ideas in the form of its ‘regulatory sandbox’.
In the words of Christopher Woolard, the FCA Director of Strategy and Competition, the sandbox will allow firms to test out innovative ideas “without immediately incurring all the normal regulatory consequences”.
The thinking behind the sandbox is very simple. It will offer a dedicated area for firms to do something a little different, to focus on creative ways to address customer needs, freed from the fear of how the regulator will react to products and services that do not marry up with the existing way of doing things.
This is a boon for a specialist finance market where product innovation has been stifled by regulation since the financial crisis.
As Woolard acknowledged, the existing regulatory process is an expensive one, with firms incurring “significant costs”. With the sandbox, not only is the cost of exploring new ideas and business models much cheaper, but the usual rules do not (necessarily) apply.
The FCA will be able to waive particular rules for sandbox firms, as well as issue individual guidance on exactly how the regulator interprets existing rules within the context of the test.
Unregulated firms taking part in the sandbox will go through a tailored authorisation process, granting them restricted authorisation. The sandbox is also open to authorised firms who want to try something different.
Of course, there will still be plenty of protection in place for consumers who are impacted by the testing. The FCA has made clear that it does not want this ‘safe space’ to result in risks being transferred from providers to customers.
Exactly what form the consumer protection will take will vary, depending on what is being tested. But sandbox firms will have to have a clear ‘exit strategy’ for customers involved with the testing, whether that means halting the business or transferring them to third parties.
Overall, I think the sandbox is a terrific idea. The financial services market – and the mortgage market in particular – is desperate for a fresh approach.
Regulation has obviously been a good thing, adding a huge amount of credibility to the mortgage industry and pushing out the rogues and rulebreakers.
But there is little doubt that, for many firms, the shadow of the FCA, and before that the FSA, has loomed large over their activities. Understandably, firms do not want to rock the boat too much, concerned that by bringing a fresh approach they may incur the wrath of the regulator.The sandbox creates a safe area for innovation to be given a chance to thrive, with appropriate oversight and guidance from the regulator.
Even the regulator acknowledges that strangling innovation is not what it wants. It wants to see more competition, better results for consumers, and new and exciting ideas making it to the market. It clearly wants to position itself as an enabler for new ideas, not as a barrier for them.
One of the reasons the specialist finance market has enjoyed such strong growth in recent years is that it is an area where providers have been able to embrace innovation, making use of new technology and funding models but arguably not through introducing genuinely innovative new products.
The acid test will be what comes out of these sandbox trials, though. There are no doubt those who will look skeptically at this initiative, dismissive of whether it will actually deliver any meaningful benefits.
It is up to the FCA, and the firms involved with the sandbox from the outset, to prove the doubters wrong.
This sandbox test needs to produce something tangible; it can’t just pay lip service to embracing innovation while reinforcing the status quo.
Matthew Tooth is head of distribution at LendInvest