FCA to launch financial services ‘test bed’

FCA logo glass 620x430

The FCA has announced plans to launch a “safe space” where firms can test out new products and services without the normal regulatory consequences.

The regulator was asked to investigate the feasibility of developing a so-called regulatory sandbox by the Treasury.

In a report published today, the FCA says it will expand Project Innovate to include a sandbox unit, which would consider sandbox applications and monitor the testing process.

This will open in spring 2016 and be tested with a limited number of firms over the first year.

The sandbox will allow unauthorised firms to test out new propositions by granting them authorisation with restrictions. The restrictions can later be lifted once the firm is able to meet full requirements.

For authorised firms, the FCA says it could issue ‘no enforcement action letters’.

These would state that no enforcement action will be taken against testing activities where the FCA is satisfied the activities do not breach its requirements or harm its objectives.

The regulator adds it would be appropriate for it to reserve the right to end a trial, and that firms would still have a liability towards their customers.

The FCA says: “We believe that the benefits that the sandbox can bring to firms should lead to better outcomes for consumers through, for example, an increased range of products and services, reduced cost, and improved access to financial services.

“However, there is potential for customer detriment when innovative financial products or services are tested in real life situations. This risk needs to be carefully managed.”

It says there are a number of options to ensure consumer protection. These include requiring customers to give consent to be included in a trial, or giving customers the right to complain to the Financial Ombudsman Service and Financial Services Compensation Scheme.

The regulator says its preferred option is for it to agree on disclosure, protection and compensation with firms on a case-by-case basis.

The FCA also suggests that a “virtual sandbox” could be introduced by the industry.

This would be an environment to enable all firms, whether regulated or not, to test their solutions virtually without entering the real market.

It says private sector stakeholders should also consider setting up a not-for-profit sandbox umbrella company. This would need to seek authorisation from the FCA and could then allow businesses to act as appointed representatives for the duration of the trial.

Project Innovate was set up a year ago and has so far helped 175 firms, five of which have now been authorised to undertake regulated activities.