How fintechs innovate: introducing the regulatory nursery

The Financial Conduct Authority is aiming to encourage a more cohesive fintech ecosystem with its new brainchild: the regulatory nursery


Building on the momentum created by Ron Kalifa’s independent review of the fintech industry in February, the Financial Conduct Authority (FCA) is set to open what it’s calling a regulatory nursery before the end of the year. The aim of this scheme is to better equip fintech firms in their infancy by offering them mentoring and other guidance, while promoting competition and effective regulation in the sector. 

Partnering innovation and regulation

Since its creation in 2015, the so-called sandbox licence awarded by the FCA has enabled fintech enterprises to test potential new products and services on a small group of consumers in a controlled environment before releasing these on a commercial scale. 

There is evidence to suggest that it has been successful. According to research published last year by the Bank for International Settlements, firms using the sandbox system raise on average 15% more capital thereafter than those that don’t, while “their probability of raising more capital increases by 50%”.

But the sandbox’s one-size-fits-all approach to licence approvals subjected both callow and experienced fintech companies to the same rigorous regulatory protocols. This left many of the former out of their depth. Indeed, of the 24-firm cohort that entered the sandbox in 2018, nine businesses went on to fail. 

By setting standards earlier on in the fintech ‘journey’, we can work collaboratively in building a stronger sector

In creating the regulatory nursery, the FCA aims to address this problem by equipping the participants with bespoke guidance that stresses how important it is for them to meet regulatory standards. 

The head of the FCA’s innovation division, Maha El Dimachki, explains: “Our aim is to ensure that fintechs have the tools to succeed and consumers have as much choice as possible. By setting standards earlier on in the fintech ‘journey’, we can work collaboratively in building a stronger sector.”

It’s not only the nursery that’s paving the way for more robust and sustainable fintech solutions for consumers. Understanding the vital role that innovation plays, the FCA has permitted startups to enter the sandbox at any point of their choosing, rather than at a set time each year.

The ‘journey’ of a fintech sandbox 

Zeeshan Uppal is a co-founder and non-executive director at Yielders, the first Islamic fintech firm to be regulated by the FCA. He recalls that a “great aspect of the sandbox for us was the level of transparency awarded by the FCA. We were assigned a caseworker who was able to give us honest feedback.” 

But Uppal adds that there were also setbacks. “It was a lengthy and meticulous process that lasted two years. Although we gained vital experience throughout this period, we found the timelines hard to work with. And it can be hard to become operational without the rubber stamp from the FCA.” 

Since obtaining such approval, the six-year-old investment platform has gone on to serve more than 8,000 users in 45 countries, settling investments worth £12.5m to date. 

Uppal and co-founder Irfan Khan, who is now heading MMOB, had amassed a combined 10 years of experience in the financial services sector before setting up Yielders.

“We were lucky to have regulatory and banking experience, but it was still difficult to navigate through the process, as regulatory standards were geared towards a traditional banking system at the time. It’s great to hear the Regulatory Nursery will be providing dedicated guidance and mentorship to infant fintechs who may lack operational experience.”

The impact of regulation on financial innovation

The Regulatory Nursery is encouraging. It provides a backdrop to an even playing field for emerging fintechs. While it is the role of the FCA to remain impartial with regards to pushing trends, El Dimachki explains it’s about ensuring the “right balance of regulation to support innovation, competition and economic growth.” 

While this may be true, future trends cannot be ignored. Monzo recently launched ‘Monzo Flex’. a product combining the best of  ‘Buy Now, Pay Later’ (BNPL), credit loans and overdrafts, enabling it to  compete with the likes of Klarna, ClearPay, Revolut and PayPal. And it seems like a strong business move, with a loyal customer base of 5 million, and the Woolard Review estimating 5 million people in Britain used BNPL in 2020, Monzo could profit substantially as BNPL products continue to grow in popularity, despite the lack of regulation in the area at present.

The rapid growth of a “marketplace” approach to banking during COVID-19 has certainly spurred competition and choice in the market, democratising finance for retail consumers. However, while product offering is essential to competition, financial literacy is not. In a recent survey by investment app Freetrade, of the 2000 British respondents, nearly 50% couldn’t answer simple questions regarding personal finance. This lack of financial awareness means while fintechs continue to innovate, now more than ever, regulation remains critical in protecting everyday consumers. 

The future of fintech innovation

In establishing the Regulatory Nursery, the FCA hopes to jumpstart regulation as a core operational point for infant fintechs, embedding the importance of long-term sustainability in the sector. Consumer trust is a contentious point, as data collection concerns and fear of the unknown play a huge role in mistrust of technology. Despite this, the mass adoption of fintech across the UK shows promise of an upward trend. It is however, up to fintechs to build trust within their operational model – with FCA approval being a secure way in. 

As fintechs continue to evolve and expand their product offerings, the intention of the Nursery is to provide advice and assistance, giving rise to innovation by providing regulatory support. It is through this oversight the Nursery plays a crucial role in allowing fintechs to build their own solutions. As fintechs continue scaling towards becoming full-service banks, it is the consumers who are at the helm. It is their needs that ultimately enable fintechs to create innovative solutions, demonstrating that when it comes to innovation and regulation, the consumer remains on top.