The Financial Conduct Authority (FCA) operates a ‘regulatory sandbox’, which is a scheme whereby firms can test out new and innovative ways of delivering their services, and receive certain protections from the need to follow some of the usual regulatory requirements. It is part of the wider Project Innovate scheme.

A firm applying for authorisation with the regulator must normally meet a series of onerous requirements. A new firm applying for authorisation under the sandbox scheme will not be subject to the same requirements, although they will still need to meet the FCA’s threshold conditions. Once the authorisation process is complete, a sandbox firm will be ‘authorised with restrictions’, i.e. their permitted activities will be restricted to those connected with the testing of their idea, and they can test their ideas in the marketplace.

Sandbox applications will only be considered by the FCA if the applicant firm can demonstrate that their innovations will result in a direct or indirect benefit to customers.

Existing authorised firms may also want to consider making use of the sandbox. If the firm’s tests of any ideas they are considering might breach the FCA’s rules, then the regulator may agree to an application to waive or modify this rule for the firm in question. The regulator says it may do this where the “waiver or modification would not adversely affect the advancement of any of our objectives.” Firms should note that the FCA has no powers to over-ride UK or international law in this respect, so all sandbox initiatives must comply with applicable legislation. The FCA may then issue the firm with a ‘no enforcement action letter’, confirming that if the firm sticks to the agreed testing parameters and continues to treat its customers fairly, that the regulator would not expect to take disciplinary action.

The full list of criteria a firm must meet to be considered for the sandbox are:

· The proposal must demonstrate genuine innovation
· There must be a demonstrable benefit to consumers, either direct or indirect
· The firm’s idea must be intended to be tested in the UK financial services market
· The firm must be ready to launch its innovative proposition
· The tests must be feasible

The FCA has suggested it will not welcome sandbox applications if:

· The activity to be tested is not one covered by its regulatory regime
· The offering is already widely available in the marketplace
· The firm could feasibly test its ideas via methods other than a ‘live test’, such as through market research
· The firm could feasibly test its ideas without being in danger of breaching usual FCA rules and requirements
· The firm lacks the resources to carry out the necessary testing
· The firm fails to put in place sufficient safeguards for customers

This means that firms must be confident they are ready to launch their idea when they make their application.

Are you considering taking part in the sandbox initiative? Speak to one of our experts today for confidential and no obligation advice.

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