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Firms can now apply to participate in FCA's new regulatory sandbox

Financial services firms and technology companies can now apply to participate in the new 'regulatory sandbox' scheme being run by the Financial Conduct Authority (FCA).

The initiative will enable successful applicant companies to test innovative products, services, business models and mechanisms of delivery under a light-touch regulatory framework. Applications for the first wave of testing under the scheme can be submitted up until 8 July.

"Supporting innovation is an essential part of our role in promoting competition in the interests of consumers," Tracey McDermott, the FCA's acting chief executive, said. "Our aspiration is that the sandbox not only enables innovative ideas to be tested and brought to market, but also helps to reduce the time and the cost of getting them there."

Christopher Woolard, FCA director of strategy and competition, said last month that the regulator would choose applicants with the "most doable tests" when selecting participants for the first cohort of testing under the initiative.

"We are setting up a tailored authorisation process, which means that sandbox firms will first be authorised with restrictions, allowing them to test their ideas but no more," Woolard said. "They still need to apply for authorisation and meet threshold conditions, but critically only for the limited purposes of the sandbox test. So the authorisation tests should be easier to meet and the costs and time to get the test up-and-running reduced."

"If, after sandbox testing, the firm wants to launch itself into full activity on the wider market, it can do so if it satisfies the threshold conditions for that wider activity. We think this strikes the right balance – regulation that starts in proportion to the scale of the concept being tested and can grow with the ambition of the full business model," he said.

Woolard said that the FCA will generally issue individualised guidance to firms that participate in sandbox testing and that compliance with those guidelines would be read by the regulator as compliance with the "rules to which the guidance relates". The FCA said that in certain circumstances it may be able to grant waivers to rules to sandbox firms but in some cases it might not be able to issue guidance or waivers.

"It is possible that in a small number of cases we may not be able to issue individual guidance or waivers," Woolard said. "For those rare cases, there may be circumstances in which we could use a ‘no enforcement action’ letter. These letters aim to give firms comfort that as long as they deal with us openly, keep to the agreed testing parameters and treat customers fairly, we accept that unexpected issues may arise and will not take disciplinary action. The letters will only apply for the duration of the sandbox test and only to FCA disciplinary action. They cannot limit any liabilities to consumers."

The launch of the regulatory sandbox highlights the FCA's support for innovation and will enhance its reputation around the world as a "progressive regulator", financial services and technology law expert Yvonne Dunn of Pinsent Masons, the law firm behind Out-Law.com, said.

"The FCA's use of its powers to waive rules and issue no enforcement action letters will greately help to continue its support of innovation in the regulatory sandbox," Dunn said. "The FCA will obviously need to balance consumer protection against the advantages of innovation when it is applying the test of undue regulatory burden and considering difficult rules of interpretation. We would encourage the FCA to be as open and transparent as possible in this regard."

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