Having shown little initial interest in promoting innovative IT products for use by private banks and other financial firms, the US Securities and Exchange Commission has finally opened its Strategic Hub for Innovation and Financial Technology (FinHub). It has borrowed the terminology it uses from the British model, but there is to be no corresponding relaxation of rules for start-ups.

New companies or financial firms that have already established themselves as IT providers but want to join the 'FinTech' or financial technology club can go to www.sec.gov/finhub and fill in a 'request form' for FinTech-related meetings and other assistance. The SEC welcomes meetings about account-related enquiries, the interpretation of relevant rules, custody inquiries, the determination of this-or-that instrument as a 'security,' intermediary registration, securities registration, trading platform registration, and other things.

Meetings can occur on the subjects of advisory services related to digital assets, automated investment tools/robo-advisors, digital assets, digital marketplace financing, funding portals, machine-learning/artificial intelligence, pooled investment vehicles/funds related to digital assets, and other things.

Terminology

Digital marketplace financing generally refers to financing methods that do not use traditional financial institutions as intermediaries. The financing can be in the form of loans, often called online marketplace lending, or equity or equity-like securities, often called crowdfunding.

Automated investment advisors/robo-advisors are investment advisors that typically provide asset management services through online algorithmic-based programmes. The term refers to any automated service that ranks, or matches consumers to, financial products and services on a personalised basis. The SEC has been trying to regulate these firms since their appearence.

Some US regulatory agencies have taken steps to learn about robo advice as part of their larger efforts to cope with FinTech but they have done so largely within the confines of their own regulatory silos. The San Francisco bay area is 'ground zero' for automated wealth management. There is no formal inter-agency co-ordination in the United States on the subject and international co-ordination is even less developed, save for the newly announced Global Financial Innovation Network project which does not include the United States.

The Commodities and Futures Trading Commission beat the SEC to the punch in May last year by setting up a 'hub' by the name of LabCFTC, the focal point for its efforts to promote responsible FinTech innovation and fair competition in the field.

Behind the British

The UK's Financial Conduct Authority, meanwhile, has accepted 29 firms (out of 69 applicants) to join the fourth cohort of its 'regulatory sandbox,' which relaxes the application of rules for start-ups. The FCA opened its 'authorisation hub' for business last October with the idea of talking to and co-operating with market entrants in a better and more personal way than previously, with a mixture of some dedicated software and the allocation of some extra FCA staff man-hours.

The head of the SEC has no desire to set up an actual 'sandbox,' although Arizona set one up in March. The FCA set up its own 'sandbox' two years ago as a 'safe space' in which start-ups and others can test innovative products, services, business models and delivery mechanisms in a real market, with real consumers, attracting widespread support in the regulated community. Several regulators around the globe have followed suit.

The project, however, has had its teething troubles. According to a survey of 'sandbox' firms past and present, conducted by Deloitte and Innovate Finance, many entrants have suffered from a difficult application process.

The Deloitte report states: "Once firms are accepted, they have to complete all the paperwork and set up the capabilities to obtain the necessary authorisation – typically with restrictions such as the number of customers or the volume of transactions. A majority of firms found the sandbox authorisation process, and specifically navigating and interpreting the FCA handbook, fairly daunting. The level of previous exposure of start-up teams to financial services regulation was a clear differentiating factor. Indeed, more regulatory-savvy firms – often with founders from financial service backgrounds – which had embedded 'regulation by design into their business models, found the authorisation journey much easier. On the other hand, start-ups whose founders did not have previous financial services experience – for example those whose leaders were technological experts – had to invest significant time and money in securing external legal and compliance support.

"This shows that, if a FinTech start-up is considering performing regulated activities, making an appropriate investment in compliance and legal capability should be a key component of its overall strategy. Nevertheless, while the FCA does expect firms to do their due diligence and preparation, firms also acknowledged that the regulator was very helpful in signposting (but not helping them to comply with) regulations that were relevant to their business models. In this context, several firms highlighted the importance of the FCA case officer’s role as an informed co-ordinator who is able to offer firms continued support either directly or by obtaining any necessary information from other FCA teams in a timely manner. Significantly, one firm, whose case officer had to change over the course of its testing period, due to turnover, cited the lack of continuity as a major challenge, especially as its business model was particularly complex.

"Of the various stages of the sandbox journey, the point of exit seems the least clear for firms. For example, while many of the firms we interviewed received an official “exit” day, a few had no clear “graduation day” and/or ongoing exchanges with the sandbox team, even after the submission of their final report."