The regulatory sandbox one year on: the FCA takes stock

The FCA has published a report that reflects on how its regulatory sandbox has met its objectives over the first year of its operation.

The sandbox, which was introduced in the FCA's regulatory sandbox report in November 2015 and took effect from June 2016, has been an experiment for both the FCA and the firms testing it.  It was launched as part of the FCA's Project Innovate - the objective of which is to promote effective competition in the interests of consumers by allowing firms to test innovative products, services and business models in a live market environment, whilst ensuring that appropriate safeguards are in place.

 

Indicators of success

The first year of operation has provided an early indication that the sandbox has been successful in meeting its overall objective of reducing the time and cost of getting innovative ideas to market.  Evidence in support of this includes:

  • The majority of firms that started out with a restricted authorisation have secured full authorisation.
  • 75% of firms in the first cohort have successfully completed testing, and of those firms, 90% are continuing towards a wider market launch following their test.
  • At least 40% of firms which completed testing in the first cohort received investment during or following their sandbox tests.
  • Successful sandbox tests have led to propositions from both small and large firms being introduced to the mass market.

 

Consumer protection in mind

Another objective of the sandbox is to allow the FCA to work with innovators to build appropriate consumer protection safeguards into new products and services.

The FCA put in place a set of standard safeguards for all sandbox tests to mitigate potential harm both during and after testing.  For example, all firms in the sandbox were required to develop an exit plan to ensure the test could be closed down at any point whilst minimising the potential consumer detriment.  Bespoke additional safeguards were also developed where relevant.  Examples from the first two cohorts included extra capital requirements and secondary review of robo-advice by a qualified financial adviser.  All sandbox tests followed the FCA's safeguard standards.

 

Who's been playing in the sandbox?

The majority of participants in the first two cohorts were from the retail banking sector, while general insurance and protection was the next biggest sector.  For more information on the participants in the first and second cohorts, take a look at our blog posts 'The FCA reveals its first cohort of FinTech products and services for the regulatory sandbox' and 'Two sets of heads are better than one: Introducing the second cohort of the FCA's regulatory sandbox…'.

 

Same old products, new technology

Participants used a lot of new technology, with distributed ledger technology being the most popular, and with online platforms, APIs and biometrics also being used.  However, the report noted that the majority of technology use cases related to the application of technologies to traditional products or services – as opposed to employing technologies to create entirely new products.  Whether this will change in the future remains to be seen.  It is certainly something that the FCA hopes for; it is keen to see the use of new technology resulting in innovative products and services that are better for consumers. In addition, as more firms with better products and services enter the market, it expects competitive pressure to improve incumbent firms' consumer propositions.

The report also explained that robo-advice is an emerging area of the advice market, and firms were able to benefit from the FCA's Advice Unit, which provides regulatory feedback for firms who are looking to deliver automated advice and guidance. This was one area where bespoke safeguards were introduced pre-testing; in most cases this involved qualified financial advisers checking the automated outputs generated by the underlying algorithms.

 

Lessons learned

Interestingly, the FCA reported that smooth integration with APIs took longer than expected – even for firms with experience using new systems and technology.  Although this is an area that is expected to evolve as PSD2 and the GDPR are implemented and the Open Banking API is developed, it is not yet clear how rapid this evolution will be.

The most positive "lesson learned" related to customer acquisition. Partnerships between established large firms and start-ups were a proven success for both parties; start-ups had a larger pool of existing customers to test with, while large firms were able to innovate and improve their products at a faster pace. The FCA hopes that this trend will spread beyond the sandbox to operations and activity in the market.

 

Continuing innovation

The FCA is going to use the insights from the report to continue developing the programme, suggesting that the first year of the sandbox has been a sound success.

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