The Regulatory Sandbox – Explained

Average read time: 2.5 minutes. 

Every playground has one so why should the Financial Conduct Authority ("FCA") miss out on all the fun?

In software development, "sandbox" is a word commonly used to describe an isolated testing environment for new apps or programmes. The regulatory sandbox is just that – a framework set up by the FCA, the regulator of the financial services sector in the UK, to allow small scale, live testing of innovations by private firms in a controlled and safe environment.

The FCA's aim in building the Sandbox was to reduce time-to-market for businesses wishing to innovate while providing support in identifying appropriate consumer protection safeguards to build into these new products.

How it works – the basics

Authorised and unauthorised firms and technology businesses are able to apply to enter the Sandbox via the FCA website once a new round of applications ("Cohort") has been launched. Within the application form, applicants have to set out how they meet the eligibility criteria. If accepted, participants are usually subject to a less onerous regulatory regime via waivers and protection from enforcement action which together with guidance and informal steers comprise the "Sandbox tools" available to participants as they develop their products. For example, businesses seeking to introduce new technologies in the banking and investment markets have benefited from reduced capital adequacy requirements.

Advantages

The Sandbox is a good example of collaboration between regulators and innovators aimed at encouraging the realisation and full potential of technologies, such as artificial intelligence, whilst protecting the consumer. It recognises that innovation happens faster when businesses can test new ideas without the burden and cost of compliance with exhaustive consumer protection and is better when it is tested in a live environment with real consumers on a trial basis. Other benefits include:

  • Proof from experimentation improves access to capital for innovators.
  • Consumers benefit because new technology-based products are brought to market sooner.
  • Direct communication between fintech developers, businesses and regulators creates a more cohesive and supportive industry.
  • Successive trial-and-error testing within a controlled environment mitigates the risks and unintended consequences such as unseen security flaws when a new technology is adopted in the market too quickly.

The information gathered during each Cohort cycle feeds into a lessons learned report (October 2017 report here), reflecting on insights gained and lessons learned from testing products which ultimately assists in shaping a new regulatory framework to govern these products. More recently the FCA published a report outlining the impact of innovation on firms that have been supported through the sandbox and how it promotes effective competition in the interest of consumers (here).

What's next?

Applications to Cohort 5 closed on 30 November 2018. On the 29 April 2019 it was announced that 29 businesses of 99 applicants were accepted. A list of the firms accepted can be found here. Applications are now open for Cohort 6 - apply by 31 December 2019.

Given the continued popularity of the Sandbox, it is likely that further Cohorts will follow. Steps to create a Global Financial Innovation Network and global regulatory sandbox are being taken.