The UK's Financial Services Authority has decided to help businesses develop innovative ways in which to provide financial services. The bizarre title it has given to the ‘safe space’ it wants to offer to businesses to test innovative products, services and business models, however, suggests that it does not expect the results to be particularly hygienic.

It is proposing to set up a regulatory 'sandbox', a familiar household word of which it is so unashamedly proud that it mentions it a staggering 164 times in its latest 22-page paper, "Regulatory Sandbox." The flowery language of the paper makes it hard for the reader to know what is going on in the minds of its cat-fancying authors, but there is one clue: "A virtual sandbox is an environment that enables firms to test their products and services in a virtual space without entering the real market." The word 'virtual' suggests something to do with computer modelling. The 'virtual sandbox' and the 'sandbox' might even be one and the same thing, although the paper pours cold water on this idea by saying that it is not something that the FCA ought to set up (note 4.6). Whatever the term's meaning, it is hard to square the kinds of activity a cat might get up to in a real sandbox with such financial goings-on.

Features of the sandbox

Throughought the paper the reader receives many tantalising titbits of information about what the word 'sandbox' means in the minds of its authors. One can test algorithms in it. One can enter it. One can use it to make an advice platform available to a limited number of users, which suggests that the authors have encountered many advice platforms that are available to unlimited numbers of users. It also, in the FCA's eyes, seems to be something that helps firms evaluate products before putting them on the market. The very term 'safe space' suggests this, as the market is an obviously unsafe place. A household sandbox, of course, is a very safe place although it must be cleaned regularly.

The FCA will expand Project Innovate, one of its long-term initiatives, to include a 'sandbox unit' and intends to open it "for testing proposals" next spring. 'Sandbox applications' will exist. Testing will be done in the sandbox and "safeguards for consumers and the financial system" will be necessary while that testing is going on. 'Sandbox activities' exist. 'Sandboxing' can occur. Probably the most informative clue about the nature of this mysterious product comes in note 2.6, which says that it "is intended for testing new solutions, in real life situations." The word 'solution' is bandied about the paper extensively - 33 times in all - but the authors never say what they mean by it. At times it appears to refer to software, at other times to life products and services; it seems to be their equivalent of the word 'thing.'

The FCA thinks of a 'regulatory sandbox' as something that might engender better competition among financial firms (it does not say which) by:

• reducing the time and, potentially, the cost of putting innovative ideas on the market;
• affording users greater access to "finance for innovators";
• allowing more products to be tested and then, perhaps, introduced to the market; and
• giving the FCA an early chance to build "consumer protection safeguards" into new products and services.

A not-for-profit sandbox umbrella company

The paper also suggests: "Private-sector stakeholders acting together should consider setting up a not-for-profit sandbox umbrella company. This company could seek authorisation from the FCA and then allow innovative businesses to act as ‘appointed representatives’ for the duration of the trial in question. The FCA would help with setting up the umbrella and provide ongoing support and advice."

Has it happened already?

As is often the case with FCA pronouncements, the paper disconcertingly hints that the mooted proposal is up and running already, which makes one wonder why the rest of the paper is treating it as though it lies in the future. Note 2.5 says: "The sandbox enables the FCA to work with innovators to ensure that appropriate consumer protection safeguards are built in to their new products and services before these reach a mass market."

Relieving oneself of trouble

Whatever the eventual nature of (and confusion surrounding) this forthcoming phenomenon, the FCA offers the firms it regulates a crumb of reassurance: "The FCA can waive or modify particular rules for sandbox firms. A waiver or modification would allow what would otherwise be a temporary breach of our rules." In this way the regulatory sandbox, like a real sandbox, might offer the user some relief.