As part of their commitment to promoting effective competition in regulated financial services in the interests of consumers, the FCA have developed a regulatory sandbox, which provides a ‘safe space’ to businesses for testing innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.
The FCA have published, in April 2016, the eligibility criteria and testing criteria for any firm that wishes to use the Sandbox Framework for getting the regulatory approval for their business proposition, as summarised below.
- Sandbox eligibility criteria: this sets out the criteria against which the FCA will make decisions regarding applicants for testing in the sandbox. Criteria include whether the firm is in scope, whether it is a genuine innovation, whether there is a consumer benefit and a need for the sandbox, and if the firm is ready for testing;
- Default standards for sandbox testing parameters: the standards cover duration, number of customers, customer selection, customer safeguards, disclosure, data, and testing plans.
FCA have said that the Regulatory Sandbox will be open to applications for authorisation by sandbox firms on 9 May 2016. They are expecting a high degree of bespoke engagement from the FCA staff and therefore will only be able to work with a small number of firms at a time.
The potential benefits of a regulatory sandbox could be significant from:
- Reduced time-to-market at potentially lower cost: Delays driven by regulatory uncertainty disproportionately affect first-movers and discourage innovators. Evidence from other industries suggests that time-to-market can be increased by about a third in this way, at a cost of about 8% of product lifetime revenue.
- Better access to finance: Financial innovation relies on investment, much of it through equity funding. Regulatory uncertainty at a crucial growth stage means that Fin-Tech firms find it harder to raise funds and achieve lower valuations as investors try to factor in risks that they are not well placed to assess. Evidence from other industries suggests valuations may be reduced by about 15% due to regulatory uncertainty. It is more difficult to estimate the number of firms that fail to achieve any funding at all.
- More innovative products reaching the market: Due to regulatory uncertainty, some innovations are abandoned at an early stage and never even tested. As the sandbox framework enables firms to manage regulatory risks during the testing stage, more solutions may be trialled and later potentially introduced in to the market.