What's in a Sandbox?

 Simon Taylor photo
Simon Taylor Co-founder 11:FS & CPO 11:FS Foundry
5min read

For those of you in a rush, there’s a TL;DR at the bottom of the page. For everyone else 11:FS Co-Founder Simon Taylor, has written a great deep dive for you into the regulatory sandbox: why it’s necessary, what it is, what it’s achieved so far, and most importantly a close look at the fourth cohort.

Why would someone need a Sandbox?

Let's say you've got an idea that can help people understand and manage their money better, you want to solve for financial inclusion and really make a difference in people's lives and you want to use new tech to do it. The traditional route would be to hire an army of compliance specialists and create paper forms for people to fill in or rely on a branch network to acquire new customers. Things can go wrong when you're dealing with people's hard earned cash.

What is a Sandbox?

According to their website, the FCA Sandbox is "open to authorised firms, unauthorised firms that require authorisation and technology businesses" and allows these businesses to test products, reduce time to market and therefore potentially get better access to finance from investors. They do this by providing guidance, no action letters, or even "restricted authorisation" (hey you can do that thing, but only a limited number of people).

What's happened?

A number of businesses have been through the FCA Sandbox, for example First Direct and bud launched the first open banking app which is now available to the public in beta. The FCA Sandbox has been through 3 rounds (or cohorts) and just launched their 4th. In some ways the types of company in the sandbox cohort tell you a lot about where fintech in the UK is.

Cohort 4

The FCA just announced their 4th cohort and a few things stood out:
  • This is the largest cohort ever with 29 companies. The demand is clearly growing at the bottom end of the fintech market for this capability.
  • 11 Blockchain or crypto companies made the list, many of them "tokenising" existing financial assets.
  • Lots of regtech and "AI" companies made the list. Regulation remains hard for small companies and large companies and it's a big source of cost and risk. No surprises this is in the sweet spot for the sandbox.
  • Big organisations Natwest are using the sandbox (HSBC, Barclays and Lloyds have previously) but they're often for smaller edge case projects rather than transforming their core. Could more be done here?

What does it mean for fintech?

In our recent insurtech insider show several of the companies pointed out that the sandbox accelerated their launch and was key for them getting funding. Building a business is hard enough, whether it's getting funded, getting customers, or standing out in an increasingly competitive space. Proactive outreach from regulators is something we are seeing more of, with programmes in Singapore, Australia or individual regulator programmes like Lab CFTC from the USA becoming more common. So there you have it. Frankly, the FCA Project Innovate and Sandbox team are a national treasure and helping businesses make an impact on a global stage. BTW Cohort 5 is open now TL;DR - Launching products that deal with real money is hard, lots can go wrong and the way to move risk to zero is to allow zero innovation. This is not something we want, so the UK government and the FCA created a sandbox to safely, gradually test and grow innovative financial services solutions. V4 just got announced and it's interesting for what it says about where Fintech is. We’re building propositions for organisations big and small to take advantage of all of this opportunity. Join us, or get in touch at hello@11fs.com.