News & Views

Driving innovation and growth - A regulatory double act

Like Fry and Laurie, Reeves and Mortimer, and Ant and Dec before them, the Bank of England (BoE) and the Financial Conduct Authority (FCA) are planning a regulatory double act to foster innovation and growth within the UK's financial services sector. This proactive stance aligns with Rachael Reeves’ recent reading of the Riot Act to regulators, emphasising their critical role in nurturing a dynamic and forward-looking financial ecosystem.

BoE’s Digital Pound Lab

The BoE's launch of the Digital Pound Lab forms part of its consideration of a case for minting a Central Bank Digital Currency (CBDC) and demonstrates a commitment to genuinely exploring the future of CBDCs. The BoE is very keen to inform you that its CBDC, however, would not be a cryptoasset (*cough* even though it is) because cryptoassets like Bitcoin and Ethereum are issued privately. And therein lies the irony. Cryptoassets were designed to remove banks and central banks out of payments - and here they are elbowing their way back in. 

The Digital Pound Lab is designed as an experimental platform, enabling industry participants and the BoE to collaborate on testing potential use cases and business models for a digital pound. It’s not a regulatory sandbox because no real customers or payments will be involved.

Running from August 2025 to July 2026, the Digital Pound Lab will operate in two phases, prioritising both BoE-defined and participant-driven innovative use cases. By providing a simulated environment with key components such as an API platform, demonstration ledger, and smart contract platform, the BoE aims to assess the technological and functional requirements for a digital pound and promote interoperability within the digital finance landscape. 

FCA's focus on innovation and new firms

Complementing the BoE’s initiatives, the FCA has also outlined plans to support innovative products and new firms as part of its new work programme:

1.  New authorisations - The overarching theme of fostering innovation and welcoming new blood into the financial services arena certainly strikes a chord. The FCA’s stated intention to provide dedicated case officers for those navigating the Regulatory Sandbox from the start is a pragmatic move, but one we feel is slightly ambitious. Although the latest Authorisations Operating Service Metrics states that the median period for determining a new firm authorisation application is 110 days, the upper quartile determination time is 194 days. For firms with genuinely novel propositions, cutting through the authorisation thicket with a guiding hand from the outset could prove to be a significant accelerant. 

Generally speaking, the authorisation process is very lengthy and a bit weird as you must first convince the FCA that you’ll carry on regulated activities and then that you’ll comply with the myriad of rules they’ll impose on you. Accordingly, the extension of pre-application support across wholesale, payments, and, crucially, the cryptoasset space, also signals a welcome pragmatism. Given the often intricate and, at times, opaque regulatory landscape in these sectors, early and meaningful dialogue with the FCA can be invaluable. The indication of a more transparent approach to signalling a 'minded to approve' position from the FCA on authorisations could also inject a much-needed dose of confidence for firms seeking to attract investment while labouring through the authorisation process.

2.  PISCES - The unveiling of the Private Intermittent Securities and Capital Exchange System (PISCES) is another interesting development. Any mechanism that genuinely oils the wheels of private capital investment by institutional investors, HNWIs and sophisticated retail investors has the potential to be a real shot in the arm for growth-oriented businesses.

3.  AI Lab - The FCA's proactive stance on leveraging its AI Lab to get to grips with the burgeoning use of artificial intelligence within the financial markets is a sensible step. As AI continues its march through various facets of our industry, a forward-thinking regulatory approach is paramount – both to harness the efficiencies and to effectively manage the inherent risks. One wonders, however, if the FCA will keep pace with the rate of technological development. 

In essence, the regulators’ stated directions appear to be one of encouraging innovation and facilitating entry for new players. However, as seasoned practitioners know only too well, the proof of the pudding will be in the eating. The practical application of these plans and the nuances of the implementation are things O'Connors will be watching with keen interest, ensuring that our clients are well-equipped to navigate the evolving regulatory currents and capitalise on the opportunities that may arise.

For further information, please email Joshua Bates or call 0151 906 1000.