What's the FCA's criteria for its regulatory sandbox?


As we reported in a blog late last year, the Financial Conduct Authority is launching a ‘regulatory sandbox’.

What is the FCA regulatory sandbox?

The sandbox is a safe space where financial services firms can test out new
products and services. The idea is that it will reduce the usual regulatory
restraints – while ensuring customers are protected.

This should enable financial services businesses to trial innovative new
approaches and delivery methods.

This is good news for all firms, but particularly traditional, long-established firms. We have seen a lot recently about the rise of so-called ‘FinTech’ firms using emerging technology to disrupt and innovate in banking and other financial services. This disruption is potentially good news for the consumer, but can put existing firms at a disadvantage compared to their start-up competitors.

Many financial services firms are like ocean liners – it can take a long time to change their direction. Agility and early adoption of new technologies and approaches are not typical. Anything that helps existing firms to deliver more customer-focused, effective products and services has to be a positive.

The FCA has shown its commitment to competition and innovation in banking – see our blog on the FCA and PRA New Bank Start-up Unit for news on this. But they also need to make sure existing firms are encouraged to take part in this drive for innovation.

What’s the latest on the FCA regulatory sandbox?

On 11 April, Christopher Woolard, the FCA’s Director of Strategy and Competition, gave a speech at the Innovate Finance Global Summit.

In the presentation, Woolard gave an update on the FCA’s ‘Project Innovate’. He reported that since its launch in May 2014, the regulator has had over 400 requests for support and offered direct support to over 200 firms.

He said that for the FCA, Project Innovate is ‘a vital part of fulfilling our duty to promote competition’.

He then went on to talk specifically about the sandbox – something he called ‘a bold and complex project’ and ‘a world-first for financial services regulators’.

The sandbox will open for applications on 9 May. Firms that are successful will be able to test out new ideas without immediately facing all the normal regulatory hoops.

Sandbox challenges

Woolard said that the regulator faced two main challenges when creating the sandbox. It wants to give the industry ‘the freedom to break new ground and encourage creative solutions’ … but recognises that ‘there is a limited public appetite to accept business failure if things go wrong, particularly in financial services’.  

The two challenges are therefore:

  • How to deliver a sandbox that lowers barriers to testing within the existing regulatory framework
  • How to ensure that risks from testing solutions are not transferred from firms to consumers

How will the sandbox work?

Firms will be accepted into the sandbox on a ‘cohort approach’ (i.e. a few at a time). Initially the regulator will run two cohorts a year. This, Woolard hopes, will enable the FCA to learn what works and what doesn’t, and improve the sandbox for later cohorts.

The sandbox will have five eligibility criteria. Firms need to evidence:

  • genuine innovation
  • benefit to consumers, either direct or indirect
  • the idea is meant for the UK financial services market
  • a need for testing in the sandbox alongside the FCA
  • readiness to test – in other words, being in a sufficiently advanced stage of preparation to mount a live test

The last criterion will be the decider when it comes to selecting firms to take part. Those in a position to test immediately, and with the most ‘doable tests’ will be accepted into the first cohorts.

The regulator hopes that this will introduce a competitive element that will motivate firms to submit well-developed testing plans.

Next steps

Firms can submit applications for the sandbox from 9 May (it’s not clear how yet, but presumably via the FCA’s website).

In his speech Woolard did say, though, that the regulator-led sandbox is not ‘the whole story’.

Last November, the FCA raised the idea of the industry working with (instead of being led by) the regulator. Woolard announced in his speech that Innovate Finance has agreed to lead an industry working group to explore options for industry-led sandboxes.

The regulator will be involved in this work and explore what its future role could be in this type of project.

Innovative and compliant financial promotions

If you want to innovate in your financial promotions – but need to make sure they meet compliance requirements – you might want to read our ‘10 best practices for compliant social media’. You can download a free copy here.

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