The sandbox scheme, first announced by the FCA in November last year, will allow financial services companies to test innovative products, services, business models and mechanisms of delivery under a light-touch regulatory framework.
In a speech at the Innovate Finance Global Summit earlier this week Christopher Woolard, FCA director of strategy and competition, said that firms will have to apply to trial ideas through the sandbox framework. He acknowledged there are risks and benefits to the initiative and said the FCA, like firms, will learn from the sandbox activity.
"The sandbox is a world-first for financial services regulators," Woolard said. "We will be experimenting and learning here. I expect a high degree of bespoke engagement from our staff, so we will only be able to work with a small number of firms at a time. We will use a cohort approach, not dissimilar to how accelerators operate, and initially run two cohorts a year. This way we can learn what works and what doesn’t, and improve the sandbox for subsequent cohorts."
"We will ask firms to submit applications explaining their proposition and how it meets the sandbox eligibility criteria. These will be: genuine innovation; benefit to consumers, either direct or indirect; the idea is meant for the UK financial services market; a need for testing in the sandbox alongside the FCA; readiness to test – in other words, being in a sufficiently advanced stage of preparation to mount a live test… We will choose firms with the most doable tests for the first cohorts. Thus, there is a competitive element to motivate firms to submit well-developed testing plans," he said.
Woolard said working out how to "deliver a sandbox that lowers barriers to testing within the existing regulatory framework" and "ensure that risks from testing novel solutions are not transferred from firms to consumers" have been the two "main challenges" the FCA has faced in developing the regulatory sandbox.
"We are setting up a tailored authorisation process, which means that sandbox firms will first be authorised with restrictions, allowing them to test their ideas but no more," Woolard said. "They still need to apply for authorisation and meet threshold conditions, but critically only for the limited purposes of the sandbox test. So the authorisation tests should be easier to meet and the costs and time to get the test up-and-running reduced."
"If, after sandbox testing, the firm wants to launch itself into full activity on the wider market, it can do so if it satisfies the threshold conditions for that wider activity. We think this strikes the right balance – regulation that starts in proportion to the scale of the concept being tested and can grow with the ambition of the full business model," he said.
Woolard said that the FCA will generally issue individualised guidance to firms that participate in sandbox testing and that compliance with those guidelines would be read by the regulator as compliance with the "rules to which the guidance relates". The FCA said that in certain circumstances it may be able to grant waivers to rules to sandbox firms but in some cases it might not be able to issue guidance or waivers.
"It is possible that in a small number of cases we may not be able to issue individual guidance or waivers," Woolard said. "For those rare cases, there may be circumstances in which we could use a ‘no enforcement action’ letter. These letters aim to give firms comfort that as long as they deal with us openly, keep to the agreed testing parameters and treat customers fairly, we accept that unexpected issues may arise and will not take disciplinary action. The letters will only apply for the duration of the sandbox test and only to FCA disciplinary action. They cannot limit any liabilities to consumers."
Woolard said "testing parameters and customer safeguards" will be set "upfront". Consumers will retain "existing rights" when using products or services operating within the sandbox regime, but in some cases "further protections" would also need to be put in place, he said.
Sandbox firms will also have to ensure they have "a fair exit strategy for consumers"
"Depending on the test, these exit strategies may vary," Woolard said. "By way of example, a firm may just call a halt to business, or it may transfer customers to third parties."