FCA FinTech Sandbox A Success, So Far
One of the recurring stories in alternative finance – especially in cryptocurrencies – has been the struggle of regulators to keep up with the pace of innovation. The authorities have done much better in keep a vigilant bur benign eye on what one might call “mainstream digital” finance – challenger, digital banks are a prime example.
In 2015, the UK’s Financial Conduct Authority (FCA) launched the first fintech sandbox in the world. So far, it’s been a success: according to research by the Bank of International Settlements, with 30 per cent of companies that graduated from the sandbox receiving further venture capital, with the average investment increasing by 6.6 per cent.
In the first half of 2021, we’ve already seen billions of dollars of investment into UK fintech, with 7 in 10 people in the UK using the services of at least one fintech company—one of the highest numbers in the world.
To maintain this momentum, in April FCA CEO Nikhil Rathi announced that the FCA would be launching a “regulatory nursery” to provide additional support to fintech companies and level the playing field for new players. This may sound like good news, but many firms are wondering whether the nursery will be as successful as the sandbox, and what impact it could have on UK fintech.
Graduates from the FCA’s sandbox have cited several key benefits, such as an increase in public confidence in fintech companies and a boost to the UK’s fintech scene. These benefits are bound to encourage more founders to set up fintech companies, further strengthening the sector and offering a wider choice of fintech options to the customer.
However, although the sandbox has been a success so far, participants have provided some clear feedback. In many ways, the sandbox treated companies with long track records in the same way that it treated new companies, meaning that new players could quickly become overwhelmed.
There have also been cases of fintech companies applying with one business model, only to change it once they were authorised. This puts the consumer at risk and essentially defeats the purpose of graduating from a sandbox.
The regulatory nursery aims to fix all those issues: the main goal is to help new players enter the market while maintaining a keen oversight and providing support for a longer time. This will allow the FCA to steer firms in the right direction, ensuring a level playing field and most importantly to the FCA’s strategy, protecting consumers.
New fintechs are often launched by technology-focused founders, rather than people with financial services or regulatory backgrounds. In practice, this means that many teams are often unprepared when it comes to the challenges of regulation.
Regulatory frameworks are easiest to implement right at the beginning of a company’s journey, but since many founders are inexperienced in this area, they often find themselves having to redesign and undo work in order to implement the right frameworks.
With a regulatory nursery, however, the FCA hopes to provide tech founders with guidance from the beginning. This will allow new companies to expand and grow their business in a more controlled and sustained way. More initial oversight could actually mean less needless work for fintechs and the FCA.
Historical Performance And IFISA Process Guide
- Money&Co. lenders have achieved an average return of more than 8 per cent gross (before we deduct our one per cent fee).
That figure is the result of over £24 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
- Money&Co. has been lending for over 5 years and has only had two bad debts so far, representing a bad debt rate of 0.03 per cent per annum.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
- Step 1: Register as a lender. Go to the login page, and go through the process that the law requires us to effect. This means we have to do basic checks on you to comply with money-laundering and other security requirements.
- Step 2: Put money into your account. This is best done by electronic transfer. We can also process paper cheques drawn in favour of Denmark Square Limited, the parent company of Money&Co.
- Step 3: Buy loans in the loan market. Once you’ve put cash in your account it will sit there – and it won’t earn interest until you’ve bought a piece of a loan. It’s this final step that requires lenders and IFISA investors to be pro-active. Just choose some loans – all loans on the Money&Co. site can be held in an IFISA – and your money will start earning tax-free interest.
The ISA allowance for 2020/21 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.