The FCA Regulatory Sandbox is accepting applications for its second cohort until 19 January 2017.

To support awareness and transparency of this key regulatory innovative, Innovate Finance and our strategic partners Hogan Lovells hosted a Q&A session in the lead up to the holiday season.

Having successfully launched the Regulatory Sandbox in mid-2016 with 69 applications and a first cohort of 24 companies (of which 18 are ready to begin testing), the FCA pinpointed the common stumbling blocks applicants should consider:

  • Clear test purpose / hypothesis — firms should clearly set out its test aims and how to measure success
  • Location of firm / personnel — if a firm’s proposition will require it to be authorised or registered by the FCA, it will likely be required to have a significant UK nexus
  • Partner arrangements — firms should be aware that when working with partners during testing, the necessary contracts need to be in place and these can sometimes take longer than expected to complete
  • Bank accounts — for some activities, firms are required to have a business bank account prior to testing; opening accounts can sometimes be a lengthy process
  • Technical development of product — firms are required to demonstrate “readiness” for testing and technical development should be as complete as possible
  • Financial resources — firms seeking authorisation will need to comply with relevant capital requirements and should consult the FCA handbook for guidance
  • Authorisation forms — firms seeking authorisation will need to complete relevant authorisation forms: PERG 2.7 section of the FCA handbook provides further details

The regulatory sandbox follows a 4 step process:

  1. application and assessment
  2. test set up
  3. test
  4. exit

Every sandbox firm is allocated a case officer to support the test set up. During the testing period (maximum of six months) firms are required to report back regularly to the case officer with the FCA retaining the right to stop the test at any time if required.

At the end of the test period, firms are required to submit a report on the conclusions of the tests and make a decision on whether to proceed with full authorisation.

Firms can work with multiple regulators and sandboxes in parallel.

Differences between the regulatory and industry sandbox

As the FCA was launching the Regulatory Sandbox, it appointed Innovate Finance to lead a consultation process on an Industry Sandbox. The consultation process has been on going since June 2016 and it will lead to the publication of an Industry Sandbox Blueprint by end of March 2017. More on the Consultation here.

While the Regulatory Sandbox is run by the FCA, the Industry Sandbox should be developed and resourced by the FinTech industry, in its broadest definition. It aims to create a safe space for FinTechs and industry players to collaborate on new products and proof of concepts in an “off-market” environment without reaching live consumers — unlike testing in the Regulatory Sandbox, which is “on market”.

To that end partnerships formation, resilience and operational risk testing and technical readiness can all be addressed in an Industry Sandbox before accessing the Regulatory Sandbox.

For any questions about the FCA Regulatory Sandbox, please contact sandbox@fca.co.uk. For any questions about the Industry Sandbox, please contact sandbox@innovatefinance.com.