This has been revealed in a report published by the FCA this morning on the lessons the regulator learned in the sandbox’s first year.
The sandbox opened for applications in June 2016 and allows firms to test innovative products, services or business models in a live user environment while making sure appropriate protections are in place.
The FCA said “a number of firms” used the sandbox to test a robo-advice model in a live environment.
The report said: “To mitigate risks that these models deliver unsuitable advice, we have ensured that firms build in additional safeguards before they begin testing.
“In most cases, this has involved qualified financial advisers checking the automated advice outputs generated by the underlying algorithms.
“One sandbox test involved an experienced adviser being present when a consumer received automated advice.
“This enabled the adviser to check and, if necessary amend, recommendations before the advice was delivered to the client.”
The FCA said this would allow the firm to make amendments to the underlying algorithm based on the adviser’s assessments.
In another ongoing test, a firm is testing the automation of the end-to-end advice process so that once a consumer submits their response to the online fact-find, they automatically receive their suitability report.
To test this while avoiding the consumer acting on unsuitable advice, consumers are told not act on the report until they have received a second notification confirming the advice is suitable.
This allowed the qualified financial adviser to check the output of the model and enables the firm to test their proposition effectively.
More broadly, around 90 per cent of the firms that completed testing in the sandbox’s first cohort have moved towards a wider market launch.
Testing in the sandbox also helped firms access funding, with around 40 per cent receiving investment during or following their tests.
The FCA said it was too early to draw conclusions on the overall impact of the sandbox, but it said the early indications are that it has been successful in meeting its objectives of promoting more effective competition.
Around half the firms which took part were from the retail banking sector, with the next largest group being from the general insurance and protection sector.
Distributed ledger technology – or DLT – was the most popular technology used across the first two cohorts, with 17 firms using it in some way, with most of these being electronic money or payments institutions.
DLT is when data is distributed between multiple parties with each participant in the network having their own copy of the data, which remains in line with every other copy as updates occur.
The FCA also saw a small number of mortgage propositions tested in the sandbox, including a model for those looking to move house which guarantees a sale within 90 days or provides an interest-free loan for 95 per cent of the property’s market value.
During the test the firm was asked to hold capital above the regulatory minimum to make sure it had sufficient funds and it found that demand exceeded expectations.
Among the issues the FCA found was the fact that it can be difficult for small firms without a well-established customer base to acquire customers, and that some firms found it harder to become authorised because their business model did not fit neatly into the regulator’s categories.
damian.fantato@ft.com
