We all know what a sandbox is a - small box of sand where children can experiment and play in a controlled environment. A regulatory sandbox is simply an extrapolation. It offers regulated participants the chance to experiment in a controlled environment without fear of the consequences that would normally be present in the 'real world'.

For most of us, the sandbox was a place to play and create, where ideas flowed freely and no one minded a little mess. For regulated persons, the FCA's sandbox provides an opportunity for technological experimentation and creativity; and as the programme looks to collaborate with overseas partners, the resulting sandbox could be bigger than any that you played in as a child.

What is the FCA's regulatory sandbox?

The FCA's regulatory sandbox is part of its Innovate programme, which is targeted at Fintech companies and other financial firms looking to use innovative ways to improve consumer outcomes and increase market competition. Since its inception in 2016, the FCA's regulatory sandbox has supported 60 firms in testing their innovations with real customers in the live market under controlled conditions. The stated intentions behind the sandbox were: reducing the time it took to take innovative ideas to market; facilitating greater access to finance for innovative firms; enabling innovative products to be tested prior to a full market roll-out; and ensuring that appropriate consumer safeguards are built into innovators' products and services.

Buckets and spades: sandbox tools

So what exactly does the FCA's regulatory sandbox contain? Sadly, there isn’t anything with which to construct a medieval castle, but the FCA has made available the following tools to assist innovators in trying out their new ideas in a controlled environment:

  • Restricted authorisation: The FCA has created a tailored authorisation process for firms accepted into the sandbox. This is a substantial curtailment to the normal authorisation procedure but any authorisation is limited to allow testing of only the ideas agreed with the FCA.
  • Individual guidance: Where a firm is unclear as to how an FCA rule may or may not apply, the FCA is willing to offer an explanation as to how the requirements should be interpreted.
  • Waivers or modifications: The FCA may also be able to waive certain burdensome rules for the purposes of the tests. It is, however, unable to waive national or international laws.
  • No enforcement action letters: where the FCA is unable to waive a rule, and where the firm continues to deal with the FCA in an open manner, keeps to agreed parameters and treats customers fairly, the FCA can issue 'no enforcement action' letters. These remain valid for the period of the sandbox and serve to prevent the regulator from taking disciplinary action.
  • Informal steers: The FCA is willing to provide an informal steer on the potential regulatory implications of an innovative product or business model in its early stages of development.

Playing with friends from around the world

While regulators in other jurisdictions have also offered sandbox or equivalent programmes, the FCA's has by far the greatest potential for global reach in scope and application. In fact, in the FCA's business plan published in April this year, it was mentioned that following responses from sandbox participants, the FCA will look to work with other regulators from around the world with a view to expanding the territorial scope of its sandbox work, moving towards a truly global sandbox. This would enable firms that operate internationally to take advantage of the various sandbox tools in order to trial products and ideas that are intended to be rolled out on an international basis. To date, the FCA is the only major regulator to have made this commitment and is leading the pack. This makes the FCA's regulatory sandbox the most appealing on offer.

Currently the FAC already has agreements with the Australian Securities and Investments Commission (ASIC), the Monetary Authority of Singapore (MAS), the Hong Kong Monetary Authority (HKMA), the Onatario Securities Commission (OSC), the Financial Services Agency of Japan (JFSA) and the Commodity Futures Trading Commission in the USA (CTFC). The hope is that throughout 2018, these agreements will be strengthened to allow the creation of a cross-border sandbox. After inviting views from interested stakeholders in March of this year, the FCA hopes to be able to construct a blueprint for a global sandbox, in co-operation with foreign regulators, over the next few months.

What next?

The FCA has not committed to publishing a global sandbox blueprint by a particular date, though it would be wise to expect one in the next few months. The process for applying to be part of the sandbox cohort is already available to review, and firms interested in participating in the global sandbox are advised to begin looking at application requirements now.