FCA’s regulatory sandbox process brings benefits and challenges to participating firms, research shows

• Programme proves positive, highlighting issues for FinTechs around navigating regulatory authorisations and finding clients to test on
• More clarity on point of exit needed and calls for better use of ‘cohort networks’

A survey of users of the Financial Conduct Authority’s (FCA’s) regulatory sandbox has found that whilst FinTechs who have been through the process so far are broadly supportive of the regulator’s model but there are areas that firms believe could be amended to improve users’ experience and understanding of regulatory obligations.

Deloitte, in collaboration with Innovate Finance, the independent membership body representing the UK’s global FinTech community, surveyed both current and previous sandbox participant firms to find out how useful and practical they found their sandbox journey. To date 89 firms have been accepted into the sandbox programme (from 276 applications*) including 29 firms accepted into the most recent cohort.

Thoughts on the Four Stages of Sandbox

Those accepted into sandbox revealed a wide variety of reasons for firms applying to join. Regulatory engagement, the opportunity to test unique models with real customers and the increased market credibility were some of the top reasons for applying. Some firms cited a ‘badge of honour’ or pride in being accepted to the programme, with users believing that acceptance increased their credibility with both customers and investors.

The second stage of the process requires users to complete paperwork to obtain authorisations and meet regulatory goals. A majority of firms found the authorisation process daunting, including navigating and interpreting the FCA’s handbook. At this stage those start-ups who did not have previous exposure to financial services regulation struggled more than those who had financial services backgrounds – suggesting that FinTech start-ups should consider making appropriate investment in compliance and legal capabilities.

The testing stage proved a challenge for many firms, with factors such as finding willing customers to test on, time constraints on testing alongside ‘business as usual’ cited as particularly tricky. Another challenge at this stage was the need for users to open business bank accounts, which many found time-consuming and a delaying factor

Users transition out of the sandbox at the end of their testing period. The point of exit, the research suggests, is the least clear for firms. Whilst transitioning out can take many forms depending on how the firm chooses to proceed, some firms had no clear ‘graduation day’ and/or ongoing exchanges with the sandbox team.

Commenting on the findings, Suchitra Nair, Director at Deloitte said; “Overall the FCA’s sandbox journey was a positive experience for many of the participating firms. The biggest benefit of the sandbox by far has been to give unique business models a chance to test and compete in the regulated space.”

Charlotte Crosswell, CEO of Innovate Finance, added; “Looking beyond specific projects within the FCA sandbox, its biggest achievement so far could be seen as breaking the myth of regulation being a barrier to innovation. Regulators can, on the contrary, play an active and positive role in encouraging innovation by giving unique business models ‘permission to play’ in the highly competitive financial services sector. It is clear that the sandbox model is still evolving and we hope to see it expand and succeed in the years to come, both in the UK and internationally.”

Suchitra Nair, Deloitte concluded; “The potential expansion of sandbox models at an international level is one we’re following with interest. At a time of ever-increasing internationalisation in financial services, the development of a sandbox that allows international regulators to work closely together and enable firms to test cross border would be hugely beneficial to the FinTech industry.”

The full report and findings can be found here