The FCA “Regulatory Sandbox” Explained.

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The Regulatory Sandbox is the next step in the FCA’s ambitious move to embrace, encourage and enable greater innovation in the finance sector. The sandbox is a strong indication that the FCA is really committed to fostering greater innovation in the finance world, enabling the creation of radically new products, services and business models to benefit consumers. But what is exactly is the Regulatory Sandbox?

The Regulatory Sandbox is a proposal, that if passed, will form part of FCA’s existing broader Project Innovate programme. With the addition of the sandbox, young finance start-ups will be able to test run their innovative products, services and business models outside of the normal regulatory restrictions, allowing them to fully explore their viability without many of the usual strings attached.

While Project Innovate provides valuable informal support and guidance for innovators in the planning and development phases, the sandbox takes it a step further and gives firms the opportunity to manage regulatory risk during the actual testing phase. In this way, firms cut out a significant portion of risk, increase their attractiveness in terms of seeking funding, and are able to bring a tested product to market in a shorter period of time. As always, a main focus is on the services that are provided to customers, and the sandbox ensures that consumers are protected through safeguards built into the testing phase.

The FCA will be developing two sandbox units. The first is an industry led virtual sandbox which will allow firms to test their products in a virtual environment; for example, by using publically available data sets, or data made available by other players in the industry. In this way, firms can test their services without ever entering the market, cutting out the need for many regulatory restrictions for this phase.

The second is a private sector led umbrella company, which will allow firms to act as appointed representatives for a trial period and will allow unauthorised firms to test their products in the real market without needing to observe the full scope of regulatory requirements. Several companies and products would be ineligible for this option due to the nature of the service, these include e-money or payment services, as well as insurance underwriters. This umbrella approach will likely take a considerable amount of time to implement, but all indications point to it being a worthwhile wait.

Apart from customers, those most likely to enjoy game-changing benefits from the sandbox are undoubtedly the innovators, and proposals are set to be opened in the spring of this year. The months before then will see a significant amount of stakeholder engagement to finalise implementation designs.

The FCA’s Regulatory Sandbox is welcomed addition to the broader Project Innovate scheme. Up until now Project Innovate has provided support and guidance to finance start-ups in the planning and development phases. If approved, the Regulatory Sandbox will take things one step further and actually let these start-ups test their innovate products, services and business models in a way that is safe, but that temporarily avoids the regulatory constraint they would be under if the sandbox did not exist.

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About the Author
Blogs are generated by the staff of Pragmatic Compliance Solutions who have had regulatory experience of over thirty years each. Compliance started with the AFBD back in 1987 and both the compliance experts that run Pragmatic Compliance Solutions were well into their careers by then. They have watched compliance develop from a time when insider dealing was acceptable, to the current state of virtually total control. A whole new industry has evolved in this period of change to safeguard the clients and the financial system. Pragmatic Compliance Solutions has become aware that the regulations are now so complex, it is difficult to find one service provider with all the answers, let along cost effective answers. Hence the company was born.

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