The FCA seeks industry feedback to capitalise on global regulatory sandbox trend.

The regulatory sandbox was pioneered by the Financial Conduct Authority (FCA) back in November 2015 — a “safe space” in which businesses can test innovative products, services, business models, and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.

The sandbox has been a success to date, helping both existing and new businesses to develop and launch innovative products and business models (see Latham’s previous blog post on the success of the first round of sandbox participants, and Client Alert that tracks the use of the sandbox model across the globe).

Encouraged by the accomplishments of the existing sandbox, which is only available to firms wishing to test in the UK, the FCA has announced that it is considering the merits of creating a global sandbox. The FCA highlights that, as many aspects of financial markets and FinTech are global, firms may wish to test in several jurisdictions. Although certain other jurisdictions do have variations of the sandbox, and the FCA does have cooperation agreements in place with regulators in a number of other jurisdictions (most recently with the US Commodity Futures Trading Commission), there is currently no facility for businesses looking to launch in more than one jurisdiction to coordinate their testing across different markets.

Consequently, the FCA is asking for views from interested parties on the merits of creating a global sandbox, requesting responses by 2 March 2018.

Though the idea of a global sandbox is ambitious, the benefits could include:

  • Access to multiple regulators in one application, and the ability to test and launch concurrently in multiple markets
  • Ability for regulators to work together to solve global or cross-border issues arising during testing, potentially leading to greater coordination and negating the need for businesses to discuss issues with different regulators separately
  • Chance for regulators to share difficulties and concerns and learn from one another, making them more familiar with the issues faced by innovative businesses and FinTech firms

However, the sheer scale of the FCA’s proposal raises a number of questions, some of which present issues that may be difficult to overcome in practice, such as:

  • Which regulators would participate in the global sandbox? What would happen if key jurisdictions refused to take part? Would the FCA take a coordinating role?
  • How would a single sandbox work for numerous jurisdictions, and would a collection of regulators with very different markets and concerns be able to take a cohesive approach? Given that it has not been possible to set up comprehensive US or EU sandboxes to date, would it really be possible to have a global sandbox?
  • Would businesses really receive a seamless service, or could the sandbox potentially end up being a bottleneck, with one regulator delaying testing and launch in any jurisdiction?

These and many more difficulties would need to be considered by the FCA before proceeding. That said, the fact that the FCA is starting a discussion on this idea, despite the obvious challenges, is admirable. Perhaps with one eye on its post-Brexit positioning, the FCA is seeking to maintain its reputation as a leading global regulator and a champion of innovation.