What has happened?

The Financial Conduct Authority (FCA) has launched a call for input on the need for a cross-sector regulatory sandbox.

What does this mean?

The FCA has published a call for input, asking for opinions about the concept of a cross-sectoral sandbox - a single-point of-entry sandbox for firms to test innovative propositions with multiple UK regulators, in a controlled environment.

The regulator said that the consultation should be of interest to a very wide range of firms, regulators and consumers, including FCA-regulated firms that (plan to) use emerging technologies to facilitate business models spanning at least one other regulator, firms subject to a UK regulatory authority and that consider diversifying into the financial services sector, governmental bodies, policy makers and ThinkTanks, regulators, as well as consumers.

The regulator noted that technologies such as artificial intelligence, distributed ledger technology are affecting how consumers, firms and regulators interact.

Technology is also changing business models across all markets and more and more firms want to test products and services based on new technologies that are also being explored in other markets.

Similarly, the emergence of big data is also changing business models with firms in most markets increasingly using big data sets.

The FCA said that these developments suggest it and other regulators should be considering innovative ways to work together more effectively.

According to the FCA, a cross-sector sandbox would allow regulators to work together in a practical way to gain a shared understanding of new technologies, and provide insights on emerging trends in different markets.

Such a sandbox might also allow firms to more easily engage with relevant regulators to improve confidence that their concepts are compliant in different regulatory contexts.

This could involve live testing of new products in a controlled environment with simultaneous oversight from multiple regulators.

The FCA said it envisions a cross-sectoral sandbox that could ultimately provide a mechanism for firms to test products, services or ideas across multiple regulators.

It would also create a forum for regulators to share practical understandings and lessons learnt from overseeing emerging technologies and innovative business models.

While regulators may be able to put a framework in place for a future cross-sectoral sandbox, any testing framework would need to have regard to the different legislation that underpins each sector, for example an assessment of the compatibility of different regulators’ regimes and remits.

A future operating model would also need to consider the different objectives of each regulator; some are safety critical regulators, others regulate (physical) critical infrastructure, and others oversee intangible services and market integrity.

Other opportunities and challenges

A cross-sector sandbox could be a useful for regulators to gather insights and understand new developments in the market, particularly with new and emerging technology.

Regulators would also be able to develop an understanding of new technologies in line with other sectors and then create a common or harmonised regulatory approach to the development of these technologies.

A cross-sector sandbox could also help with new, complex business models.

In China for example, the ‘hyper platform’ model has been emerging and Alibaba group conducts activity from social commerce platforms, retail and wholesale marketplaces, marketing technology, cloud computing, logistics and financial services (Ant Financial).

A cross-sector sandbox may also support firms looking to diversify into a new sector.

For all the potential opportunities, the FCA thought that a cross-sector sandbox would also face challenges, similar to those it faced when developing its own sandbox or those GFIN members experience when setting up a global testing environment.

Other challenges are unique to this initiative, however, and include a potential lack of demand, firms misunderstanding the purpose of the sandbox, the fact that regulators have different mandates and objectives, which could create uncertainty around testing and who can apply.

As regulators would provide regulatory feedback through the sandbox, this could result in firms losing the incentive to develop in-house knowledge.

This risk would be exacerbated if firms fail to develop knowledge and appropriate regulatory controls beyond the testing phase.

Feedback is expected by 30 August 2019.

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