Leapfrogging the Regulatory Sandbox

Shaun Ledgerwood, CEO of Niu Technology Solutions, today published a blog post (Link here -http://www.bobsguide.com/guide/news/2016/Aug/22/the-regulatory-sandbox-a-catalyst-for-innovation/) about the FCA in Britain and how they are helping to drive innovation in the U.K. financial services sector. Here is an excerpt of his post:

“The Financial Conduct Authority (FCA) is moving with the digital times by playing a key role in creating a regulatory environment for Fintech to thrive. As part of the FCA’s Project Innovate – an initiative introduced in late 2014 to promote competition through disruptive innovation – the FCA recently introduced the regulatory sandbox to offer new entrants to the market a chance to test their products in a safe environment. 

The three lines of defence: a threat to innovation?

When collaborating, the biggest challenge that banks and Fintech companies face is the regulator’s traditional approach to compliance. At the moment, most banks are using the ‘three lines of defence’ approach to demonstrate and structure roles, responsibilities and accountabilities for decision making in order to achieve effective governance, risk management and assurance. …”

Please refer to the full article for more of Mr. Ledgerwood’s thoughts on the topic.

We like what Mr. Ledgerwood has said and agree that the FCA should be commended for their approach, but we a few thoughts to add…

The FCA approach to driving innovation is to invite a cohort to apply to participate. That is, Fintech companies apply, and are accepted or not accepted based on the FCA’s criteria. Someone, or group, is making that decision, and they are limited as to how many they can invite to participate because of limited personnel to shepherd the Fintech’s through the process. Right now the FCA is limited to a cohort of only eight Fintech’s and we assume that they are a mix of startups, but we don’t know.  Our approach would be a more inclusive, more easily scalable SaaS platform (software as a service) sandbox.

We would also like to add that we see a fourth barrier – corporate structure, culture and the bottom line of incumbents. Companies need to change how senior management are incented to innovate, even to perhaps fail (!) - and for that to be okay with shareholders as long as it is in service of the greater long term goal of innovation.  Short term pain for long term gain. Most large incumbents are innovating through acquisition (buying up technologies that fit with their offerings) and the big banks are siloed where leaders of business groups are unable to affect change (they can’t work to develop innovative technology solutions to enhance UX if it blows their quarterly results). 

Many believe the UK is leading the world with its regulatory sandbox model. And that we should be more cautious and less hopeful in Canada for this type of solution because countries that are embracing these approaches are the ones with simpler regulatory frameworks and more advanced ecosystems. We don’t agree. We think that Canada can make massively accelerated progress – but we need to make it a top priority, stop being so risk adverse and come together with solutions, and get government funding to support an industry-led solution. After all – the sandbox is an innovation in and of itself. Has anyone heard of Canarie? A government funded program that looks a lot like what a sandbox could be – and it was established several years ago. https://www.canarie.ca/

At a Fintech conference in Toronto on Aug 18th, attended by about 300 various companies within the Fintech ecosystem, a member of the audience asked Mike Sigal from 500 Start-ups what he thought Canada should do to “catch up” with other more advanced countries like the US and whether he thinks Canada can be a Fintech leader? Mike paused, seemingly to re-phrase what 1st came to mind, and then said….let me see, you are a smaller country by population, you have a small number of financial institutions comparatively, and while your regulatory system is complex as you say, you don’t have 50+ states and a myriad of other complex regulatory issues like the US….so you guess what I think Canada can do? (I am para-phrasing). Earlier – he said bluntly … “Canada has the opportunity to leap-frog” on the innovation curve.

In the end, everyone is forgetting that the consumer has the final say and they are choosing digital disruption at a faster and faster pace daily. The sooner everyone realizes this and act with absolute urgency throughout their silo’s, regulators and FI’s alike, the better chance our large incumbent financial institutions and tech companies have to survive the next decade.

Sue Britton

FinTech Growth Syndicate, 628 Fleet Street, Unit 1006, Toronto, ON, M5V 1A8