The FCA intends to open a sandbox unit to help firms test potential robo-advice offerings and “innovative products” in spring 2016.
According to the watchdog their new sandbox unit will allow businesses to test out new, innovative financial products, services or business models without incurring all the normal regulatory consequences of engaging in those activities.
The launch of the unit comes after the regulator came under fire from Harriet Baldwin, the economic secretary to the Treasury, for making innovation difficult back in September.
Ms Baldwin said a start-up that wanted to enter the automated advice space was told it would have to ask consumers 247 questions to comply with regulation.
She said a ‘sandbox’ for innovation in this space was required that could be a “safer space” for firms to experiment with ideas for consumers without the full burden of regulation.
Under the plans published today (10 November) in a 26-page paper, firms that do not yet have FCA authorisation will be able to make use of the sandbox.
The FCA has suggested that these firms will be able to use a tailored authorisation process that will allow only for the testing of products and services.
For authorised firms, the FCA is proposing to use tools such as a virtual test or live testing with certain waivers that it argues can give firms confidence that enforcement action will not be taken at a later date in relation to attempts to bring something innovative to market.
To guard against the risk of consumer detriment and risks to market integrity, the FCA is proposing it will agree on the appropriate safeguards with firms on a case-by-case basis.
The FCA has suggested a number of additional solutions open to the industry acting collectively, such as establishing a virtual testing environment and setting up an authorised umbrella company that allows innovative businesses to act as its ‘appointed representatives’ for the duration of the trial.
Approaches to sandbox testing being considered by the FCA are listed below
Approach 1) As in clinical trials, sandbox firms can only test their new solutions on customers who have given informed consent to be included in testing.
Customers are notified of the potential risks and the available compensation.
Approach 2) FCA agrees on a case-by-case basis the disclosure, protection and compensation appropriate to the testing activity.
Approach 3) Customers have the same rights as customers who engage with other authorised firms (e.g. complain to firm, then to the Financial Ombudsman Service (Fos), and have access to the Financial Services Compensation Scheme (FSCS) if a firm fails).
Approach 4) Businesses undertaking sandbox trials are required to compensate any losses (including investment losses) to customers and must demonstrate that they have the resources (capital) to do that.
emma.hughes@ft.com
