Regulatory Sandboxes — A groundbreaking innovation for right-touch regulation

It is not often that regulators encourage industry to openly innovate and are themselves open to feedback, constructive challenge, and collaborate ways of working. The Financial Conduct Authority’s (FCA’s) expansion of Project Innovate to include Regulatory Sandboxes demonstrates just that.

With this next step, the FCA appears to be moving further away from the frequently used and sometimes hostile term of “watchdog” to a more “adult supervision” role, which is typically what innovators require to accelerate scaling-up improved consumer solutions in a more capital efficient way.

This is great for FinTech in the UK and is heralding the introduction of “right-touch” regulation in the digital era.

In November the FCA issued a Regulatory Sandbox Report, proposing to give innovators access to set of supervisory tools which will equip them to perform controlled tests of the fitness for compliance of early stage product solutions in a more structured and accelerated fashion. This is of value to all innovators in helping reduce the capital expenditure of new (regulated) digital product development.

The FCA called out to industry and trade associations to openly collaborate on 2 different regulatory sandbox models:

1. A “Virtual Sandbox” to enable innovators to test their solutions through common industry data sets and a range of regulatory tools to enable this prior to full authorisation

2. An “Umbrella Sandbox” to enable an independent non-for-profit industry body to take the regulatory supervision and liability of new innovate digital solutions that require limited consumer testing prior to full authorisation

This week Innovate Finance joined the British Bankers’ Association (BBA) and the Association of British Insurers (ABI) in providing a first response to the FCA call to action. Our summary presentation can be found here.

Innovate Finance supports the FCAs consultation on the development of regulatory sandboxes and will support the on-going development encouraging the programme to abide to these key principles:

· The ultimate objective of a (regulatory) Sandbox is to accelerate greater market competition and range of access to quality financial solutions by consumers

· Sandboxes need to be open and accessible to all FinTech players, from seed start-ups to institutions

· All Sandbox applicants must pass a “fit for purposes” test prior to entry into the Sandbox

· A joint working Steering Group should be established between Project Innovate and Industry / Membership Associations to foster collaboration

· The collaboration should focus on the improvement of working processes and skill levels of ALL of the involved parties.

Earlier this year and prior to the FCA call, Innovate Finance started the development of a Member Sandbox programme for 2016 which has been driven by direct feedback from members in 2015 through roundtables, member meetings, and working groups:

· A “start-up sandbox” to provide members with access to bank accounts, financing, and institutions for POC development

· A “showcase sandbox” that provides members with a platform to demonstrate use cases to financiers, government, regulators, and the community

· A “regulatory sandbox” that accelerates the compliance and authorisation process of innovative product solutions

· An “industry sandbox” that promotes industry uses cases for technology, applications, solutions, adoption, standards and interoperability.

We have had the benefit of early thinking of the use of sandboxes thanks to excellent input from our members — just the sort of thing you would expect from a community of innovators! We are looking forward to working with our members, the FCA and the industry to collaborate on this ambitious and groundbreaking development in regulation in 2016.

The extension of Project Innovate to Regulatory Sandboxes further strengthens the case for why the UK has the blueprint for the best FinTech ecosystem in the world.

Lawrence Wintermeyer

CEO Innovate Finance