Regulatory sandbox: 5 key things to know

Sandboxes aren’t just for children. They’re for organisations, too. Around the globe, the regulatory sandbox provides a safe playing ground for businesses to test new innovations and technologies. They are most often associated with the finance industry and fintech firms.

To dig deeper into this topic, we have broken this blog into 5 key sections:

• What is regulatory sandbox?
• Countries with regulatory sandboxes
• Example #1 - The regulatory sandbox FCA
• Example #2 - The MAS fintech regulatory sandbox
• Other industries that use sandboxes

What is regulatory sandbox?

A regulatory sandbox is an environment where firms can test new innovations under the supervision of a regulator. The aim is simple: to facilitate innovation in a safe and responsible manner. Innovations that can be tested include new products, services, solutions, technologies, business models and even policies.

Often, regulation is relaxed or rules are adapted to create a more conducive environment for experimentation. As new innovations can change industry landscapes, sandboxes also help regulatory bodies to evolve their regulatory frameworks and keep pace with developments. For example, to ensure consumer protection.

Many countries have regulatory sandboxes for this purpose. The UK has been viewed as leading the way with the trend after the Financial Conduct Authority (FCA) introduced its regulatory sandbox in 2016.

Countries with regulatory sandboxes

In recent years, regulatory sandboxes have sprung up in many regions across the world – not just the UK. Some examples of countries with regulatory sandboxes include:

• Australia – Enhanced Regulatory Sandbox (ERS)
• Bahrain – CBB’s Fintech & Innovation Unit
• Canada – Canadian Securities Administrators (CSA) Regulatory Sandbox
• India - International Financial Services Centres Authority (IFSCA) Regulatory Sandbox India
• Kenya - Capital Markets Authority (CMA)
• Malaysia - National Technology and Innovation Sandbox (NTIS)
• Russia – The Bank of Russia's regulatory sandbox
• Singapore – Monetary Authority of Singapore (MAS) fintech regulatory sandbox
• United Kingdom – Financial Conduct Authority (FCA) regulatory sandbox

Often deemed examples of advanced regulatory sandboxes, let’s take a closer look at the UK and Singapore frameworks.

Example #1 - Regulatory sandbox FCA

In the UK, the Financial Conduct Authority (FCA) allows firms to test their products and services with real consumers in a controlled space. Meanwhile, the FCA provide support and supervision. This support includes a dedicated case officer and help with establishing the safeguards that will be necessary to protect consumers. Participation can help firms to get their innovations to market faster, while potentially reducing costs.

Who can apply?

Authorised firms, unauthorised firms that need authorisation, and technology companies can all apply. In order to promote innovation, firms who wish to apply must strive to deliver something new to UK financial services. Notable firms that used this sandbox include Barclays, HSBC, Lloyds and Nationwide.

What products and services were they testing?

Barclays experimented with a piece of RegTech that aimed to track regulatory updates in the FCA Handbook. Nationwide, meanwhile, tested a service that would provide advice on savings and investment.

When can firms apply?

Previously, the regulatory sandbox FCA was only open for applications at certain periods throughout the year. This meant that companies participated in cohorts. However, in August 2021, the FCA announced that the sandbox is open for applications all year round.

Other key points:

The FCA are planning changes to improve their offering. This comes after criticism that their sandbox put start-up firms at a disadvantage. To address this, the regulator is set to open regulatory nurseries before the end of 2021. These regulatory nurseries aim to provide additional support and guidance for new firms.

What's more, the FCA recently called for applications from companies wanting to test new environmental, social and governance (ESG) data and disclosure products. This was part of their digital sandbox framework. Applications closed this week, although it is hoped the developments will make strides within the area of finance and sustainability.

Example #2 - MAS fintech regulatory sandbox

Like the FCA, the Monetary Authority of Singapore (MAS) aim to encourage innovation within the finance industry. Specifically, the MAS are looking for technological innovations that:

• enhance value and efficiency
• help to improve risk management
• generate brand new opportunities
• generally benefit the lives of those living in Singapore

A key part of achieving this aim is providing a safe space that encourages companies to innovate. This is where their sandbox comes in.

Who can apply?

Financial institutions and fintech firms can all apply to the MAS regulatory sandbox. The services that they are testing must be (or intend to be) regulated by the MAS.

Why do the MAS want firms to apply?

If financial institution or fintechs are unsure whether their proposed products or services will meet regulatory requirements, the MAS regulatory sandbox provides a controlled testing environment. Regulatory and legal obligations are relaxed to allow for experimentation. So, if things go wrong, the impact will be contained.

When can firms apply?

The same rule as the FCA’s sandbox applies here: applications are open throughout the year.

Other key points:

The MAS also have an ‘Express’ version of their regulatory sandbox for low-risk products or services. For companies that fit the entry requirements, this can be a quicker route to market.

Regulatory sandboxes are not just for the finance industry

As the previous examples demonstrate, regulatory sandboxes are common within the financial industry. However, other sectors can also benefit from using them.

The UK government, for example, are currently consulting on the introduction of a regulatory sandbox for the transport industry. The aim, as with other regulatory sandboxes, is to support responsible innovation by helping regulatory bodies and innovators to work together.

The Civil Aviation Authority also have their own regulatory sandbox schemes that invite companies to develop innovative solutions to industry challenges. Companies that have utilised them include Amazon and Boeing, with Amazon testing their Prime Air service.

Another example is the CQC regulatory sandbox. It was set up by the Care Quality Commission, which regulates health and social care in England. The CQC regulatory sandbox facilitates collaboration between the regulator, providers, and innovators. The aim? To find innovations and technology that can improve the delivery of care.

The regulatory sandbox Malaysia also operates beyond the finance industry. Targeting multiple industries such as medicine and healthcare, travel and tourism, agriculture, and education, the National Technology & Innovation Sandbox aims to advance Malaysia through technological innovation.

The importance of innovation and regulation

Given the number that exist all around the world, it is clear that the regulatory sandbox can be a useful tool. It is also clear that innovation is a top priority for many sectors, while abiding by regulation remains a key concern. This is especially true for the finance industry, in particular the FCA and MAS. Discover our latest Regulatory Hub, which contains a range of valuable resources to help you navigate the latest regimes introduced by these regulators.

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Our Regulatory Hub collates essential information surrounding the latest financial regulations: SMCR and IACG.

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Written by

Abbie Glossop

As Digital Content Executive at Ideagen, Abbie is responsible for writing engaging and educational content for Ideagen’s digital channels. With a background in writing and social media, Abbie is committed to understanding the needs of our customers and providing insightful and valuable content that helps them to achieve their objectives.