Sandboxing 2.0: an alternative to tearing up the rulebook
Research Intern
Earlier this year, the Financial Conduct Authority (FCA) opened applications for its ‘Supercharged’ Regulatory Sandbox, ten years on from the first iteration of its scheme to give tech companies a faster route to bringing their services to the financial sector. The idea is simple: provide a controlled space for business to trial innovative services otherwise constrained by the UK’s complex regulatory regime. The FCA’s assessment of how well these new services work, and the kinds of regulation they might require, can inform the way that both the regulator and the company decide to work going forward.
Originally designed for FinTech services, regulatory sandboxing has made waves throughout other sectors, from social care to cell-cultivated food products. Indeed, sandboxing has also caught on worldwide. The FCA claims over ninety-five other regulators have introduced a similar sandbox model in the past decade - Germany’s 1,000-strong Regulatory Sandboxes Network now boasts an annual Regulatory Sandbox Innovation Prize.
The model’s theory is straightforward. Companies offering an innovative service like a novel payments solution are approved to conduct business in a closely-monitored (but real) business environment with a simplified set of regulations for a trial period. Building on data and in consultation with participants, consumers, and wider industry experts, the regulators learn what works.
Importantly, a sandbox is not just another word for a pilot scheme. While pilots platform a new policy or practice and gather feedback, a sandbox centres the business first; how might a start-up make a difference that directly improves business for consumers, and what risks emerge in practice. The process is two way: companies may modify their practices to become compliant and ‘graduate’ into the full regulatory regime, while post-trial consultation reviews may result in regulatory amendments and guidance updates.
The “Supercharged” version of the FCA’s sandbox partners with NVIDIA and their AI Enterprise Software Suite, and promises better datasets, advanced GPU clusters for testing AI software, and a host of training resources. The first trials will kick off this October.
Sandboxes aren’t the perfect answer to the problems of over-regulation, or of risky technologies and consumer protection concerns. If we think that an area of regulation is too cumbersome, we shouldn’t be afraid of repealing it at large, outside the sandbox environment. Sandboxes have also attracted plenty of criticism. A New York Department of Financial Services Superintendent infamously remarked that ‘toddlers play in sandboxes, adults play by the rules.’
But there is a bigger picture to consider. Sandbox-thinking works off the idea that only by momentarily ‘breaking’ the rules can you hope to imagine the real-world implications of reforming them, or – to quote Rachel Reeves earlier this year – “tearing them down.”
With the Prime Minister in December pressing regulators to make growth one of their core objectives, the FCA’s tech-bolstered sandbox is also an attempt to signal the regulator’s commitment to this end. And when it comes to business growth, there’s plenty of proof that the previous regulatory sandbox has succeeded in its objectives. Companies completing successful testing within the UK’s FCA sandbox received on average 6.6 times more investment than their peers. Meanwhile, since 2016 the FCA’s sandboxing efforts have also successfully reduced the average time required for a firm’s market authorisation by 40%.
It is statistics like these that call into question our tendency to simply adopt ‘cutting red tape’ as a shorthand for growth. Sandboxes show how regulators can actually facilitate economic growth through collaborating with industry, expediting compliance burdens, and enacting incremental yet innovative and tested-quality regulatory change.
The more we learn from regulatory sandboxes, the more lessons will emerge which could be applied more widely. If the existing regulatory regimes prove too difficult to reform, and regulators remain too stuck in their ways, then shifting more approvals into sandboxes geared for new market entrants and new technologies may be the best route for the Government to take.