This article is part of a Global Entrepreneurship Week (#GEW2021) series putting a spotlight on policies designed to help entrepreneurs start and scale, and the crucial role policy makers play in building a strong entrepreneurship ecosystem.
Kauffman Foundation surveys have found that nearly three-quarters of entrepreneurs in the U.S. believe that government regulations on businesses are complex and hard to follow. This is why a key pillar of the Kauffman Foundation’s America’s New Business Plan is for governments at the federal, state and local levels to streamline business registration and improve regulatory flexibility to help more innovative businesses launch.
The UK’s Financial Conduct Authority (FCA) provides an example of how regulators can work with startups and incumbents alike to nurture innovation. In 2014, the FCA launched Project Innovate with a specific remit to encourage innovation in the interests of consumers. This is a wide-ranging and ongoing initiative that has now supported over 700 firms through one-to-one guidance, hackathons (“TechSprints”), policy development, and international collaborations.
As part of Project Innovate, in 2016, the FCA launched its Regulatory Sandbox with the aim of helping firms test products and services in a controlled environment; reduce time-to-market; and identify appropriate consumer protection safeguards to build into new products and services. The sandbox provides firms with access to a range of tools, including restricted authorization, signposting, informal steers, waivers or modifications to FCA rules, no enforcement action letters, and individual guidance.
Demand was strong from the start. Sixty-nine firms applied for the first cohort. Twenty-four were accepted and 18 ultimately took part. Participation was not limited to startups; Citizens Advice tested an advice tool to help clients compare solutions to debt, and two of the ‘big four’ banks took part - one testing a new approach to supporting branch customers, the other partnering with a startup to develop an app to help customers better manage their finances.
Seven cohorts – and 153 firms – have now gone through the sandbox. All of the ‘big four’ banks have taken part, as have non-financial institutions including DLA Piper, Hitachi, the British Heart Foundation, and the Post Office. Notable successes include small business bank Mettle, buy now, pay later provider Zilch, and open banking platform Bud.
The widespread impact of the sandbox has been documented in several reports, including by the FCA, Deloitte, and the Alliance for Innovative Regulation. The FCA evaluation highlights that the sandbox and Project Innovate led to a 40 percent reduction in time to determine authorisation application, that 50 percent of sandbox tests featured a collaboration between a startup and an incumbent, and that the sandbox has delivered positively against the three aims set out above.
The government-commissioned Khalifa Review of UK Fintech in 2021 highlighted the “instrumental role” of the sandbox in supporting innovation and encouraging UK fintech. It noted though, “as other jurisdictions are launching their own initiatives, the UK needs to take steps to ensure that its own offering remains market-leading.” In response, the FCA has announced several new developments this year, including:
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removing the cohort approach to the sandbox and moving to an always-open model;
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launching a ‘scalebox’ to help firms focus on scaling innovative technology;
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launching ‘regulatory nurseries’ to provide more oversight to newly-authorised firms;
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replicating a previous ‘Green Fintech Challenge’;
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building on a Covid-inspired pilot to launch a permanent Digital Sandbox;
The FCA is also leading on global coordination and collaboration with over 60 financial regulators through the Global Financial Innovation Network (GFIN). Some of the earliest sandbox participants had noted that while the FCA was innovating to allow them to operate in the UK, the lack of sandboxes and similar regulatory flexibility in other countries limited their ability to expand to new markets. The FCA now holds formal cooperation agreements with 12 regulators around the world, with 11 operating referral mechanisms to share information on innovative finance firms between them.
The FCA was the first financial regulator in the world to implement a regulatory sandbox, but as the scale of the new initiatives announced in the past year show, it is likely to remain at the forefront of financial innovation for the foreseeable future.