The UK Financial Conduct Authority’s regulatory sandbox has switched from having a cohort-based approach to ‘always open’ status.
A sandbox is a trial-and-error testing space in which fintech projects can be undertaken without the risk of infringing financial regulation. They are becoming increasingly popular among regulatory authorities worldwide, with sandboxes having launched this year in countries including Italy, Greece and Spain.
The FCA’s sandbox, which was created in 2016, is often cited by other regulators as partly inspiring their own versions. It has accepted seven cohorts of businesses – the cohort approach is widely used elsewhere.
But, with effect from this month (August), the UK sandbox’s operation has changed to become always open.
The move was trailed in a speech by the FCA’s chief executive, Nikhil Rathi, in April, when he said that the regulator would “shortly begin allowing year-round applications for the sandbox and better advertise the support we already offer those firms looking to build out their innovative offering.”
Regulatory sandbox reaches ‘maturity’
‘While the cohort approach was appropriate for a testing environment, which served as a blueprint for regulators all over the world, the sandbox required changes to reflect its maturity and the lessons learned since its inception in 2016,’ the FCA states in a section of its website explaining the move.
The change reflects recommendations in the HM Treasury-commissioned Fintech Strategic Review made in February. The independent review, led by Ron Kalifa OBE, proposed that the sandbox become available on a rolling basis, rather than through time-limited windows.
‘By making this change, firms can now access our sandbox testing services at the right point in their development lifecycle, to maximise the benefits of live market testing for progressing their innovative models,’ the FCA states.
The seventh cohort attracted 58 applications, with 13 accepted. The first cohort, in 2016, attracted 69 applications, with 24 accepted. Over the seven cohorts in total 501 projects applied to enter the sandbox with 159 accepted, according to Global Government Fintech’s count.
But cohorts continue (for now) in the digital sandbox
Cohorts may have been dispatched into history in the regulatory sandbox but they continue to be used – for now, at least – in a different FCA sandbox: the ‘digital sandbox’, which launched last year and aims to support earlier-stage innovation. Applications for its second cohort open on 6 September.
This sandbox is being run with the City of London Corporation (CoLC), a municipal authority. The Kalifa Report proposed that the digital sandbox should have a ‘permanent’ footing.
Ninety-four organisations applied for what is being referred to as its ‘pilot’ outing, with 28 picked to take part in an 11-week programme, which ended in February. Participating teams presented the solutions they had developed across three areas – scams and fraud, consumer vulnerability, and small- and medium-sized enterprise financing – at a series of demonstration days.
A 35-page evaluation report, published by the FCA and CoLC in April, found that ‘synthetic data’ was the most valuable feature cited by participants in the first cohort – and also seen as the sandbox feature with greatest potential for improvement.
The evaluation report also concluded that future cohorts should have a narrower topic focus. The second cohort’s topic focus seeks to do precisely that by welcoming applications for new products and services in the area of environmental, social, and governance (ESG) data and disclosure. More specifically, the aim is to tackle challenges including how technology can be used to automate the assurance of a listed issuer’s ESG data and validation of its ESG-labelled corporate bond issuance (for example, via the Internet-of-Things, decentralised ledgers, centralised platforms, satellite imaging and artificial intelligence); and how technology can help consumers understand the ESG characteristics of the products and providers they engage with.
This is a topic of growing interest. The Bank for International Settlements (BIS) Innovation Hub and Hong Kong Monetary Authority (HMKA) this week announced ‘Project Genesis’: an initiative exploring the tokenisation of green bonds combined with real-time tracking of environmental outputs. Meanwhile, the FCA itself is also running a second ‘Green Fintech Challenge’ and ‘Sustainability TechSprint’ in October. Also, in a speech last month, UK chancellor Rishi Sunak said the government would be working with the FCA to create a sustainable investment label – ‘a quality stamp’ – to enable consumers to compare the impacts and sustainability of investments.
‘Scale-box’ and ‘regulatory nursery’: on their way
Beyond the original regulatory sandbox and newer digital sandbox, the FCA is also charged with implementing further similar initiatives to help private-sector fintech projects.
Sunak announced in April that the FCA would be taking forward a recommendation in the Kalifa Review for a ‘scale-box’ to provide regulatory assistance for firms that have moved beyond start-up status.
The FCA is currently designing the scale-box and is expected to engage with industry in the coming months to seek feedback ahead of its final design.
The authority is also working on plans to create a ‘regulatory nursery’ by the autumn, as flagged in its CEO’s April speech. “This will create a period of enhanced oversight as those newly authorised firms develop and grow used to their regulatory status,” Rathi explained at the time. “Currently, firms gain regulatory status and are treated in the same way as a firm with a long track record. The regulatory nursery will keep us in close contact with firms immediately post-authorisation so we can provide support and, where we need to, intervene earlier to steer firms in the right direction.”
Government authorities are also keen to help fintech projects to scale internationally but getting pan-jurisdiction sandbox-style product testing off the ground has so far proved challenging at a regulatory level.
The FCA chairs the co-ordination group of the Global Financial Innovation Network (GFIN), which opened applications for the first ‘official’ cohort of a global sandbox last year. Details on progress seem scarce but, according to the FCA’s website, GFIN is currently ‘working with a select group of firms to agree cross-border testing plans’.
An eight-page ’lessons learned’ document, published by GFIN in January last year, reported that none of eight firms selected from 44 applications for previous cross-border trials actually began testing because they ‘did not develop a testing plan that satisfie[d] each jurisdiction’s criteria’. The document says the project was ‘previously known as the global sandbox’ and prefers the phrase ‘cross-border testing’.
‘Italy launches fintech sandbox’ – our news story (19 July 2021) on Italy’s Ministry of Economy and Finance, the Bank of Italy, financial regulator Consob and the Italian Insurance Supervisory Authority (IVASS) announcing that a decree launching a sandbox and establishing a ‘fintech committee’ had entered into force
‘Greece launches EU-funded regulatory sandbox in fintech push’ – our news story (15 June 2021) on Greece’s central bank launching a sandbox funded by the European Union via its Directorate-General for Structural Reform Support and implemented in collaboration with the European Bank for Reconstruction and Development
‘Spain’s sandbox welcomes first fintech projects’ – our news story (25 May 2021) on Spain’s regulatory sandbox preparing to welcome its first cohort of fintech projects
‘20-plus regulators back global sandbox as it prepares for first “official” cohort’ – our news story (2 November 2020) on regulators from countries including the UK, Canada, USA and Australia – coming together as the Global Financial Innovation Network (GFIN) – opening applications for a global fintech ‘sandbox’