Home Fraud, Error and Debt UK’s FCA puts fighting fraud centre-stage in regulatory sandbox

UK’s FCA puts fighting fraud centre-stage in regulatory sandbox

Cyber-crime: 'area of importance' as the FCA opens applications for its latest regulatory sandbox cohort | Credit: rgaymon; Pixabay

The UK’s Financial Conduct Authority (FCA) is putting the prevention of fraud centre-stage as it opens the latest application process for its regulatory sandbox.

The FCA has placed the prevention of fraud and scams, as well as supporting the financial resilience of vulnerable citizens and improving access to finance for small- and medium-sized enterprises, as three ‘areas of importance’ as focuses on tackling challenges intensified by the coronavirus pandemic.

A regulatory sandbox is a trial-and-error testing space in which fintech projects can be undertaken with real customers without the risk of infringing financial regulation. The FCA’s regulatory sandbox was created in 2016, since when it has accepted six ‘cohorts’ of businesses.

The FCA announced this week that it was welcoming applications for the sandbox’s seventh cohort. Although the three areas are priorities, the FCA says it will consider any proposal intended to help with the consequences of the pandemic, and ‘indeed any innovative financial services ventures’.

Digital sandbox pilot follows ‘data sprint’

The FCA has also this week opened applications for organisations keen to participate in the pilot of a different sandbox – its ‘digital sandbox’, which aims to support earlier-stage innovation where products and solutions are still in development.

This sandbox – which is being run with the City of London Corporation, the municipal governing body for the historic centre of the UK capital and location of much of the country’s financial sector – shares the three priority challenge areas.

The FCA said the digital sandbox pilot will also evaluate the effect that offering certain assistance to innovative firms, including access to synthetic (artificially manufactured) financial datasets, has on enabling new ideas to get to market more quickly, as well as the associated benefits for regulators and incumbent firms. Synthetic datasets could include SME lending data and customer accounts. Lessons learned will inform efforts to establish an ‘ongoing’ digital sandbox.

The FCA organised what it called a ‘data sprint’ over three weeks in July and August in which it brought together 120 participants from regulated firms, start-ups, academia, professional services, data scientists and subject-matter experts to collaborate on developing ‘high-quality’ synthetic datasets to be used by sandbox pilot participants. Organisations that took part included the Department for International Trade, the Office for National Statistics and Edinburgh’s Global Open Finance Centre of Excellence.

‘Challenges raised by the pandemic’

The FCA warned in May that criminals were taking advantage of the pandemic to carry out fraud and exploitation scams through a variety of methods, including cyber-enabled fraud.

“We are strengthening the range and scale of support we are providing to innovative firms to deal with the challenges raised by the pandemic,” said the FCA’s director of innovation, Nick Cook, this week. “Together, these services will allow us to support a wider spectrum of innovative firms, from early stage proof-of-concept development in the digital sandbox, to testing new products or services with consumers in the regulatory sandbox.”

Applicants for the digital sandbox must have a proposition aimed at tackling challenges including: how relevant bodies, both public and private, can share data in real-time relating to perpetrators of fraud; how technology can be better deployed to detect patterns or other indicators of consumer behaviour that may indicate a fraud or scam is taking place; and, in the case of lending to small businesses, how existing processes can be ‘made digital’, to effectively support small firms that may be affected by social distancing or other remote-working situations.

The cut-off date for applications for the digital sandbox is 30 October. Applications for the seventh cohort of the regulatory sandbox close on 31 December.

Twenty-two businesses were accepted into cohort six of the regulatory sandbox from 68 applications. Cohort five received the highest number of applications – 99 – with 29 accepted.

The FCA and City of London Corporation announced their link-up earlier this year.