The spring of 2016 should see the FCA opening its ‘regulatory sandbox’ to interested parties.
The concept of the sandbox is an extension of the FCA’s Project Innovate initiative – which went live in October last year – offering businesses FCA support in the introduction of innovative financial products and services to the market that improve customers’ experience and outcomes (‘disruptive innovation’).
A regulatory sandbox is a ‘safe space’ which allows a business to test innovative products, delivery mechanisms etc. without immediately incurring all the normal regulatory consequences of engaging in the activity in question. As an example the FCA provides a case study in which a firm could test an automatic advice platform (‘robo-advice’) to a limited number of consumers within the safety of a sandbox. Once the advice is issued, but before transactions are executed, financial advisers would review the advice.
With a sandbox removing regulatory uncertainty, the potential benefits of this approach could include:
- Reduced time-to-market at potentially lower cost
- Better access to finance, and
- More innovative products reaching the market.
The sandbox concept is equally applicable to unauthorised firms and authorised firms.
Unauthorised sandbox firms would be authorised with restrictions allowing them to test their products or services but no more. This ‘restricted authorisation’ process should be quicker that applying for the usual ‘full authorisation’. When launching full commercial activity, firms will need to apply to have the restrictions listed in order to carry on regulated activities but will not have to apply for a new authorisation. Restricted authorisation will not apply to activities outside FSMA such as payment services and e-money.
Authorised firms could benefit from:
- No enforcement action letters under which no FCA enforcement action will be taken against testing activities where the FCA is satisfied they do not breach their requirements or harm their objectives
- Individual Guidance on applicable rules to provide certainty that no FCA action will be taken against them, and
- Waivers or modifications that would allow what would otherwise be a temporary breach of FCA rules.
To make this happen, the FCA has identified (subject to any EU legislation) two possible beneficial changes to UK legislation:
- introducing a new regulated activity of sandboxing for testing, and
- amending the waiver test to make it easier for the FCA to waive rules.
The FCA’s plans are set out in a recently published paper which also tells us that the paper is a report to HM Treasury on the feasibility and practicalities of developing a regulatory sandbox.
The paper also captures the concepts of a ‘virtual sandbox’ (which would be introduced by industry, rather than the FCA, under which firms can test products and services in a virtual space without entering the real market) and a ‘sandbox umbrella company’ (where such a company would be authorised by the FCA and then allow innovative businesses to act as appointed representatives for the duration of the trial in question).
