In this article, we are going to jump right into the regulatory sandbox, covering its creation, process, progress and problems.
The program was started by the Financial Conduct Authority (FCA) in 2016 to provide a ‘testing ground’ for innovative FinTech products and services within the UK.
The testing stage normally runs for several months and allows early-stage FinTech startups to launch and evaluate their products in a limited market environment, whilst this is under supervision, the companies do not have to be fully licensed.
What does the process look like?
Application and Authorization
In order to be accepted into one of the FCA’s ‘prestigious’ cohorts firms have to submit an application form explaining how their proposal meets the sandbox’s eligibility criteria. These are:
- In Scope – Whether the proposal is looking to deliver innovation that is either regulated business or supports regulated business in the UK financial services market.
- Genuine Innovation – Whether the innovation represents a new or a significantly different offering in the marketplace.
- Consumer Benefit – The innovation should offer a good prospect of identifiable benefit to consumers (either directly or via heightened competition).
- Need for a Sandbox – Whether the innovation has a genuine need to test the innovation in our sandbox, although applicants aren’t required to need a sandbox tool to meet this criteria.
- Ready for Testing – Finally; whether the innovation is ready to be tested in the real market with real consumers.
Once accepted, (although this is not a sure thing; for the first cohort there were 69 applications, out of which 24 were accepted and 18 tested,), firms are required to complete all the necessary paperwork to obtain authorization(s) – typically with restrictions such as the number of customers or the volume of transactions.
After the firm is authorized, the innovations move into the testing phase….
This transition may take several months, as mobilizing capabilities for testing can be time consuming – specifically customer acquisition and opening a business bank account have proven to be common challenges for new entrants.
The testing process, despite having to be approved by the FCA, is mostly up to the firm. Another advantage comes in the form of the ability to choose the Key Performance Indicators (KPIs) used to assess the performance of the test(s) which are normally used to measure business objectives rather than regulatory compliance.
Provided the necessary consumer safeguards are in place, the FCA has normally been very flexible and willing to consider small amendments to both testing plans and KPIs if required.
As part of the testing period, firms are required to have customer safeguards and exit strategies that can be implemented when the test finishes. This means that the final step is to submit an outcome report to the FCA with test results and findings. Firms looking to continue the tested business model have to apply for a “variation of permission” to lift the restrictions imposed during the test.
Source – Deloitte & Innovate Finance – A journey through the FCA regulatory sandbox
“The Financial Conduct Authority (FCA) has, in collaboration with 11 financial regulators and related organizations, on 7 August 2018 announced the creation of the Global Financial Innovation Network (GFIN), building on the FCA’s proposal to create a ‘global sandbox’.”
The current GFIN membership is the following:
- Abu Dhabi Global Market (ADGM) – United Arab Emirates
- Alberta Securities Commission (ASC) – Alberta, Canada
- Australian Prudential Regulation Authority (APRA) – Australia
- Bank of Lithuania (BL) – Lithuania
- Bangko Sentral ng Pilipinas (BSP) – Philippines
- Bermuda Monetary Authority (BMA) – Bermuda
- British Columbia Securities Commission (BCSC) – British Columbia, Canada
- Capital Markets Authority (CMA, Kenya) – Kenya
- Capital Market, Insurance, and Savings Authority (CMISA) – Israel
- Central Bank of Eswatini – Eswatini (Swaziland)
- Central Bank of Kenya (CBK) – Kenya
- Central Bank of the UAE – United Arab Emirates
- Centrale Bank van Curaçao and Sint Maarten – Curaçao and Sint Maarten
- Comisión Nacional Bancaria y de Valores (National Banking and Securities Commission) (CNBV) – Mexico
- Commodity Futures Trading Commission (CFTC) – United States
- Commission de Surveillance du Secteur Financier (CSSF) – Luxembourg
- Federal Reserve Board (FRB) – United States
- Financial Industry Regulatory Authority (FINRA) – United States
- Financial Services Commission Mauritius (FSC) – Mauritius
- Financial Services Regulatory Authority of Ontario (FSRA Ontario) – Ontario, Canada
- Financial Supervisory Commission Taiwan – Taiwan
- Financial Superintendence of Colombia (SFC Colombia) – Colombia
- Federal Deposit Insurance Corporation (FDIC) – United States
- Gibraltar Financial Services Commission – Gibraltar
- Hong Kong Insurance Authority (IA) – Hong Kong
- Isle of Man Financial Services Authority (IOMFSA) – Isle of Man
- Israel Securities Authority (ISA) – Israel
- Jersey Financial Services Commission (JFSC) – Jersey
- Magyar Nemzeti Bank (Central Bank of Hungary) – Hungary
- Malta Financial Service Authority (MFSA) – Malta
- National Bank of Georgia (NBG) – Georgia
- New York State Department of Financial Services (NY DFS) – State of New York, United States
- Office of the Arizona Attorney General – State of Arizona, United States
- Office of the Comptroller of the Currency (OCC) – United States
- Ontario Securities Commission (OSC) – Ontario, Canada
- Securities and Commodities Authority, UAE (ESCA) – United Arab Emirates
- Securities and Exchange Commission (SEC) – United States
- Securities and Exchange Commission (SEC Nigeria) – Nigeria
- Securities Commission of the Bahamas (SCB) – Bahamas
- Securities and Exchange Commission of Brazil (CVM) – Brazil
- Seychelles Financial Services Authority – Seychelles
- South African Reserve Bank (SARB) – South Africa
- West Virginia Division of Financial Institutions – West Virginia, USA
- Wyoming Division of Banking -Wyoming, United States
Concerns have been raised over the motives a startup may have for entering the regulatory sandbox; many believe it to serve as free PR and a stamp of approval, which attracts the wrong kind of business. There is also a tendency for regulators to want to attract sandbox applicants through lax regulation; an advertisement for the Arizona sandbox ironically states “Arizona State Offering Regulation-free Access for UK Companies” – Regulation-free???
There is an increasing concern over the regulation of global regulatory sandbox, as not all regulators possess the same level of competency and compliance standards; the priority is, and always should be customer safeguarding, not increased sector investment.
In conclusion, the sandbox projects represent a positive move forwards in terms of FinTech adoption, but in order for its true potential to be realized it needs to be developed and regulated to the highest standard.