Regulatory sandbox: 5 key things to know

Aaron Hoare Date published: Jul 10, 24

Sandboxes aren’t just for children. They’re for organizations, too. Around the globe, the regulatory sandbox provides a safe playing ground for businesses to test new innovations and technologies. They are most often associated with the finance industry and fintech firms.

To dig deeper into this topic, we have broken this blog into eight sections, meaning 4 key insights and examples of regulatory sandboxes:

• What is a regulatory sandbox?
• Countries with regulatory sandboxes
• Example #1 - The regulatory sandbox FCA
• Example #2 - The MAS fintech regulatory sandbox
• Other industries that use sandboxes
• Example #3 - The UK Care Quality Commission (CQC)
• Example #4 - The UK Civil Aviation Authority
• The importance of innovation and regulation

What is a regulatory sandbox?

A regulatory sandbox is an environment where firms can test new innovations under the supervision of a regulator. The aim is simple: to facilitate innovation in a safe and responsible manner. Innovations that can be tested include new products, services, solutions, technologies, business models and even policies.

Often, regulation is relaxed or rules are adapted to create a more conducive environment for experimentation. As new innovations can change industry landscapes, sandboxes also help regulatory bodies to evolve their regulatory frameworks and keep pace with developments. For example, to ensure consumer protection.

Many countries have regulatory sandboxes for this purpose. The UK has been viewed as leading the way with the trend after the Financial Conduct Authority (FCA) introduced its regulatory sandbox in 2016.

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Countries with regulatory sandboxes

In recent years, regulatory sandboxes have sprung up in many regions across the world – not just the UK. Some examples of countries with regulatory sandboxes include:

• Australia – Enhanced Regulatory Sandbox (ERS)
• Bahrain – Central Bank of Bahrain (CBB) Fintech & Innovation Unit
• Canada – Canadian Securities Administrators (CSA) Regulatory Sandbox
• India – International Financial Services Centers Authority (IFSCA) Regulatory Sandbox India
• Kenya – Capital Markets Authority (CMA)
• Malaysia – National Technology and Innovation Sandbox (NTIS)
• Russia – The Bank of Russia's regulatory sandbox
• Singapore – Monetary Authority of Singapore (MAS) fintech regulatory sandbox
• United Kingdom – Financial Conduct Authority (FCA) regulatory sandbox

Often deemed examples of advanced regulatory sandboxes, let’s take a closer look at the UK and Singapore frameworks.

Example #1 - Regulatory sandbox FCA

In the UK, the Financial Conduct Authority (FCA) allows firms to test their products and services with real consumers in a controlled space. Meanwhile, the FCA provide support and supervision. This support includes a dedicated case officer and help with establishing the safeguards that will be necessary to protect consumers. Participation can help firms to get their innovations to market faster, while potentially reducing costs.

Who can apply?

Authorized firms, unauthorized firms that need authorization and technology companies can all apply. In order to promote innovation, firms who wish to apply must strive to deliver something new to UK financial services. Notable firms that used this sandbox include Barclays, HSBC, Lloyds and Nationwide.

What products and services were they testing?

Barclays experimented with a piece of RegTech that aimed to track regulatory updates in the FCA Handbook. Nationwide, meanwhile, tested a service that would provide advice on savings and investment.

When can firms apply?

Previously, the regulatory sandbox FCA was only open for applications at certain periods throughout the year. This meant that companies participated in cohorts. However, in August 2021, the FCA announced that the sandbox is open for applications all year round.

Other key points:

The FCA are planning changes to improve their offering. This comes after criticism that their sandbox put start-up firms at a disadvantage. To address this, the regulator has up regulatory nurseries since the end of 2021. These regulatory nurseries aim to provide additional support and guidance for new firms.

What's more, the FCA recently called for applications from companies wanting to test new environmental, social and governance (ESG) data and disclosure products. This was part of their digital sandbox framework. Applications closed this week, although it is hoped the developments will make strides within the area of finance and sustainability.

Example #2 - MAS fintech regulatory sandbox

Like the FCA, the Monetary Authority of Singapore (MAS) aim to encourage innovation within the finance industry. Specifically, the MAS are looking for technological innovations that:

• Enhance value and efficiency
• Help to improve risk management
• Generate brand new opportunities
• Generally benefit the lives of those living in Singapore

A key part of achieving this aim is providing a safe space that encourages companies to innovate. This is where their sandbox comes in.

Who can apply?

Financial institutions and fintech firms can all apply to the MAS regulatory sandbox. The services that they are testing must be (or intend to be) regulated by the MAS.

Why do the MAS want firms to apply?

If financial institution or FinTechs are unsure whether their proposed products or services will meet regulatory requirements, the MAS regulatory sandbox provides a controlled testing environment. Regulatory and legal obligations are relaxed to allow for experimentation. So, if things go wrong, the impact will be contained.

When can firms apply?

The same rule as the FCA’s sandbox applies here: applications are open throughout the year.

Other key points:

The MAS also have an ‘Express’ version of their regulatory sandbox for low-risk products or services. For companies that fit the entry requirements, this can be a quicker route to market.

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Regulatory sandboxes are not just for the finance industry

As the previous examples demonstrate, regulatory sandboxes are common within the financial industry. However, other sectors can also benefit from using them.

The UK government, for example, are currently consulting on the introduction of a regulatory sandbox for the transport industry. The aim, as with other regulatory sandboxes, is to support responsible innovation by helping regulatory bodies and innovators to work together.

The Civil Aviation Authority also have their own regulatory sandbox schemes that invite companies to develop innovative solutions to industry challenges. Companies that have utilized them include Amazon and Boeing, with Amazon testing their Prime Air service.

Another example is the CQC regulatory sandbox. It was set up by the Care Quality Commission, which regulates health and social care in England. The CQC regulatory sandbox facilitates collaboration between the regulator, providers and innovators. The aim? To find innovations and technology that can improve the delivery of care.

The regulatory sandbox Malaysia also operates beyond the finance industry. Targeting multiple industries such as medicine and healthcare, travel and tourism, agriculture and education, the National Technology & Innovation Sandbox aims to advance Malaysia through technological innovation.

Example #3 - CQC regulatory sandbox

The Care Quality Commission (CQC) in England has established its own regulatory sandbox with the objective of enhancing the health and social care sector through innovation. This sandbox creates a collaborative environment where the regulator partners with providers and innovators to test new technologies and methodologies. The main goal is to discover and implement advancements that can significantly improve the quality of care delivered.

Who can apply?

Health and social care providers, as well as tech innovators who have groundbreaking ideas or technologies aimed at improving care quality and delivery, can apply to the CQC regulatory sandbox. The sandbox is designed to support and evaluate solutions that are not only innovative but also have the potential to address pressing challenges within the care sector.

Why do the CQC want firms to apply?

The CQC’s regulatory sandbox offers a controlled testing ground, enabling participants to assess the viability and impact of their innovations without facing immediate regulatory constraints. This promotes experimentation and development while ensuring that any risks associated with new solutions are effectively managed.

When can firms apply?

Open for applications throughout the year, the CQC regulatory sandbox provides flexibility for firms looking to introduce and refine their innovations. This continuous accessibility ensures that new and potentially transformative ideas can be tested as soon as they are ready.

Other key points:

The CQC regulatory sandbox not only fosters innovation but also contributes to a learning environment for the regulator and the participants. By working closely with innovators, the CQC can adapt its regulatory approach to better support novel developments and ensure that they meet the highest standards of safety and efficacy. For example, recent collaborations within the sandbox have led to advancements in remote care technologies, improving access to services for individuals in underserved areas.

Example #4 - Civil Aviation Authority regulatory sandbox

The Civil Aviation Authority (CAA) in the UK has developed a regulatory sandbox to encourage and support innovation within the aviation sector. This sandbox serves as a unique environment where the CAA collaborates with companies to test groundbreaking technologies and concepts that have the potential to transform the industry.

Who can apply?

The CAA regulatory sandbox is open to a broad range of applicants, including established aviation companies, start-ups and technology developers. The primary criterion for eligibility is that the proposed innovation should offer significant advancements for the aviation industry, whether in terms of safety, efficiency, environmental impact, or customer experience.

Why do the CAA want firms to apply?

By fostering a collaborative testing environment, the CAA aims to spur innovation while ensuring that new technologies and methods comply with regulatory standards. This approach minimizes the risks associated with introducing untested innovations into a highly regulated and safety-critical industry. It also helps the CAA stay at the forefront of regulatory advancements, adapting its guidelines to reflect new technologies and methodologies.

When can firms apply?

Applications to the CAA regulatory sandbox are accepted on an ongoing basis. This continuous access allows for a steady influx of innovative projects and ensures that the aviation sector can rapidly adapt to emerging technologies and market needs.

Other key points:

The CAA regulatory sandbox has already facilitated significant advancements, including Amazon's Prime Air initiative to develop drone delivery systems and Boeing’s exploration of new materials and technologies for aircraft design. These examples highlight the sandbox’s role in driving industry-wide innovation while maintaining stringent safety and regulatory standards.

Furthermore, the sandbox acts as a learning platform for the CAA, helping the authority refine its approach to regulation in light of practical, real-world applications. This ensures that both the aviation industry and its regulatory framework evolve in tandem, fostering a safer, more efficient and innovative sector overall.

The importance of innovation and regulation

Given the number that exist all around the world, it is clear that the regulatory sandbox can be a useful tool. It is also clear that innovation is a top priority for many sectors, while abiding by regulation remains a key concern. By bringing the two together, sandboxes provide a space for companies to innovate while ensuring that regulatory requirements are still met.

In this way, regulatory sandboxes not only support the growth of innovative ideas but also contribute to creating a more robust and responsive regulatory framework. Through ongoing collaboration and learning between regulators and innovators, these sandboxes can drive positive change and progress within industries, ultimately benefiting consumers. As such, they play an essential role in promoting responsible innovation and safeguarding the interests of all stakeholders. So, it is important for companies across various industries to consider utilizing regulatory sandboxes as a means to drive their innovations forward.

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