U.K.'s FCA Selects 24 Firms for Second Cohort of the Regulatory Sandbox

Interest in forming part of a fintech regulatory sandbox continues to grow. After the success of the first cohort, 77 companies made submissions in the second, eight more than the first time. Of the candidates, only 31 met the requirements of the British regulator. Another seven were not prepared to start the testing phase and will be reserved for the third cohort. Thus, in the end, 24 companies will have the chance to test new products and financial services in the second round.

They are called sandboxes, or testing grounds, that use enabled platforms with the objective of experimenting with ideas, products, services or tools in a risk-protected environment. In this case, it is a regulatory sandbox specially designed for fintech projects, in which startups and other firms can test the viability of their business ideas for which there is no regulation. The objective of this project, created in 2014 by the FCA, is to foster innovation in the financial sector and make it easier, from the regulatory point of view, for proposals that show viability in the platform to reach the market.

The 24 chosen ones

The 24 firms selected, which are already prepared to start with the testing phase, cover a wide range of products and services. According to the FCA, this second group is more diverse and covers more sectors, including insurtech, payments and retail banking. Among the six focused on insurance, there is YouToggle, an application that monitors the user’s conduct, scores, and shares the information with insurance providers to obtain discounts and provide tests in case of accidents; and FloodFlash, which offers insurance in the case of floods that are activated automatically when the company sensors detect certain increases in the water level.

In addition, eight of those chosen are based on DLT technologies (Distributed Ledger Technology) with multiple applications. One of them is Diberse, which works to manage and monitor financial services for humanitarian aid through blockchain. Another is Nuggets, an application that combines this technology with biometric detection in order to provide a unique account management, payment and identity verification tool without needing to share or store private information.

The proposals for personal and safety information also have a notable presence on the list, with companies like Oraclize, which employs blockchain technology by using electronic identity cards as digital wallets thanks to the use of smart contracts and tokens. The payment sector is also covered with initiatives like ZipZap, a platform that seeks, among other options, the most efficient method of sending money to a destination, including cryptocurrency.

On the other hand, the personal finance management (PFM) startups included proposals such as Money Dashboard, a help tool that allows clients to monitor their expenses and make decisions based on analyzing financial information from online transactions. The list is not missing any startups in the robot advisors field. Beekin, which offers investment management services in alternative assets supported by artificial intelligences.

An international commitment

The U.K. is not the only country that has taken solid steps toward their commitment to regulate the fintech sector. Following the path of Great Britain, Bahrain was recently added to the list of countries that now prepare their own regulatory sandboxes like Singapore, Hong Kong, Switzerland, Thailand, Australia, Malaysia, Abu Dhabi and Canada.

Carlos Torres Vila, Chief Executive Officer of BBVA, expressed his support for this type of initiative at the annual inauguration of the summer course “La Cuarta Revolución” (The Fourth Revolution), organized by APIE and the Universidad Internacional Menéndez Pelayo. “It would be great to provide environments like these in Spain, where companies can test financial products and services without needing to comply with all of the applicable regulations.” The CEO also showed interest in expanding the scope of these testing environments beyond the financial sector to bring them to the fields of data protection and cyber security.

Recently, BBVA participated in a public consultation carried out by the EU Commission (EC) in order to promote fintech services finally taking off in the European Union. In the consultation, BBVA proposed creating regulatory sandboxes with a European scope in order to avoid divergences between different countries and to facilitate transnational projects. In addition, it proposes that the European Supervision Authorities (ESA’s) are those that coordinate the local actions with the authorities of each country, while the BCE manages a sandbox for the trans-border projects in the banking industry.

BBVA proposes that these actions be carried out in the context of an open dialog that includes the authorities of different countries and fields (both financial and digital), who should have a proactive role when supervising the initiatives and avoiding poor practices.

First results

As the FCA explains, the first 18 companies that joined the platform six months ago are now in the process of submitting final reports that will be revised before they are authorized outside the sandbox. The tests have occurred, according to the objectives indicated, and in accordance with the regulatory body. It is expected that most proposals will reach the market.

Some of these companies are already reaping the benefits of participating in this initiative. One is Billon, a micro-payment company, based on the DLT technology. Thanks to stepping into the testing arena, it has abandoned its status as a startup with restrictions to become a completely regulated entity. By being tested on the platform, carried out with 100 users, they were able to do the first cell phone money transfer through DLT technology, by using a legal currency. Now the company hopes to scale up its model to work with British SME’s and offer its software to banking entities to create value-added services.

Another is the British startup, Bud, which develops integrated platforms so that the banking industry can offer products and third-party services such as insurance and mortgages. As one of the directors, Jamie Campbell, recently explained in the regulation seminar organized by BBVA Bancomer and BID, stepping into the sandbox has translated into a “stamp of quality” for their services, and has served to acquire a much deeper understanding of the regulations in their sector.

For its part, the FCA has announced the opening of the call for the third round of companies (open until July 31), which will begin to work on the platform after November 2017.