Recommendation 24

HM Government Acknowledged

Through the FCA’s Innovation services, which include the Regulatory Sandbox, Innovation Pathways, and Digital Sandbox, we work with a range of firms to promote innovation in the interest of consumers, facilitating a regulatory environment that works well for firms as well as promoting good consumer outcomes. Our innovation offer has been replicated around the world and we are proud to be recognised as a leader in the field. However, we are conscious of the need to continuously evolve our approach; our early and high growth oversight work will allow emerging firms without the resources of larger incumbents to navigate regulation, and our TechSprints will be vital for tackling complex industry challenges. The Regulatory Sandbox allows firms to test their innovative business models live in the market with real consumers on a controlled basis, and the ability to compensate is considered as part of their application. In their applications, firms need to demonstrate that their innovative business model/ service meets our eligibility criteria, which are: In scope, Genuine innovation, Consumer benefit, Need for support, and Readiness. For our Regulatory Sandbox, as part of the testing plan firms complete, we assess these and ensure appropriate safeguards are built into the plan, which may include transaction limits or volume of customer limits. We agree, on a case-by-case basis, the disclosure, protection and compensation appropriate to the testing activity. We ensure robust controls are in place, and that testing is conducted in accordance with the agreed testing plan. There has been an acceleration in the digitalisation of financial markets and our work has increasingly focused on technology firms, who tend to be start-up firms who are looking to test new products and services in a controlled environment. This helps inform our policy and remove barriers to entry and innovation. Both the regulatory and digital sandboxes are open to more established incumbents and larger firms. In the Regulatory Sandbox 40% of the firms we support are regulated entities, and in Innovation Pathways (previously Direct Support and Advice Unit) it is nearly 30%. We have supported many large market incumbents through our innovation services, including HSBC, Lloyds, Santander, Investec, Nationwide, Barclays, London Stock Exchange, Experian and Natwest. Our support spread across retail investment, retail banking, retail lending, RegTech, Crypto, robo-advice and ESG. Positive innovation and competition can lead to new and better design, quicker, more affordable services and greater choice. It can also help markets work well with incumbents working harder to better serve consumers. The rate of innovative developments for larger institutions has not been consistent with the rapid pace of change taking place with new market entrants. We will be exploring how our market innovation services can be used to support more large firms in undertaking controlled testing of innovative products, with measured and, potentially, enhanced safeguards put in place. We are also supporting HM Treasury’s development of a new FMI Sandbox aimed at facilitating the testing of new technologies and practices. The powers for HM Treasury and the regulators to create the Sandbox and make permanent any successful rule-changes will be included in the up-coming Financial Services Bill.