Global menu

Our global pages


A year in the FCA sandbox: tips for FinTech and would be FinTech firms

A year in the FCA sandbox: tips for FinTech and would be FinTech firms
  • United Kingdom
  • Financial services and markets regulation - Briefings and articles
  • Financial services - Digital Financial Services


The FCA’s recently published report on lessons learned from the first two “cohorts” of participants in the regulatory sandbox, part of the FCA’s Innovate initiative, provides useful tips for new firms looking to test innovative products, services and business models loosely described as “FinTech”. There are useful observations for both new smaller firms and larger existing firms looking to develop FinTech products and solutions. These echo those which we have seen in guiding clients through the sandbox:

1. Be clear on how you will gain access to banks when looking to develop Distributed Ledger Technology (Blockchain), payment or e-money services.
2. Be realistic about the challenge in gaining access to customers in the sandbox environment.
3. Consider partnering with larger firms to gain access to customers and, for larger firms looking to partner with new entrants, think about your onboarding process.
4. There may be systems integration challenges, particularly where new entrants seek to gain access to customer data and systems within existing firms where technology is new.
5. Understand the Threshold Conditions for FCA authorization and how the FCA is likely to classify your business and whether you will have adequate regulatory capital.

A further point that we would add is:

6. Pay particular attention to your management and governance arrangements with clear allocation of responsibilities, including technology oversight responsibilities.        

You can access the report here.

The Lessons

Access to banking services

The FCA has witnessed the denial of banking services first-hand across a number of firms in the first two cohorts of the sandbox. Difficulties have been particularly pronounced for firms wishing to leverage Distributed Ledger Technology, become payment institutions, or become electronic money institutions. The FCA expresses its concern by what appear to be blanket refusals for certain kinds of applicant firms. There are also apparent inconsistencies within individual banks regarding how they apply their assessment criteria in approving access to banking services. The FCA notes that if certain firms cannot secure bank accounts it is possible that they will be unable to meet the conditions for authorization and would therefore be unable to enter the market, even to test in the sandbox.

Customer acquisition

The FCA highlights the issue of attracting business noting that the acquisition of customers seems to be more of an issue for smaller firms that do not enter testing with a well-established customer base. In many instances this is in itself a useful finding where the firm wants to test the commercial viability of their proposition on a small scale without necessarily committing the same level of resource they would need to get to market without the sandbox.

Large firm partnering

Partnerships between large firms and start-ups in the sandbox have proven to be successful for both parties, particularly for giving the start-up access to a larger pool of existing customers to test with. For large firms, partnerships with start-ups enable them to innovate and improve products at a faster pace, without having to go through the full development process themselves. The process of setting up their test with a partner often identified ways to improve their own procurement and governance processes for on-boarding start-ups. Being able to experience this in the sandbox enabled them to construct a more efficient process for future partnerships.

Access to consumer data and system integration difficulties

In many cases, it is difficult for firms to go directly to the financial institution to gain access to data on consumers’ transactional information to help them provide products and services better tailored to suit customers’ goals and needs, as formal routes for sharing may be unavailable. During testing, the FCA observed that smooth integration with Application Programme Interfaces (APIs) sometimes took longer than expected even among firms with experience using new systems and technologies. For example, the nascent nature of APIs within financial services made it difficult to complete the integration process within the testing period which would have allowed a range of financial institutions via APIs to provide users with a comprehensive view of their financial products.

The challenge of satisfying the Threshold Conditions for FCA authorisation

Assessing sandbox firms against the Threshold Conditions for FCA authorization is often more complex than for traditional firms as their operations may be structured differently than the models the FCA has previously seen. The FCA noted in particular that firms with certain business models have had greater difficulty in meeting the initial regulatory requirements to become authorized. This has caused small-scale testing to be particularly difficult.

Other observation in the Report

Benefits of the sandbox

The FCA noted that the sandbox is providing the following benefits:

  • Access to regulatory expertise, reducing the time and cost of getting innovative ideas to market, for example the need to spend on external regulatory consultants to understand the regulatory framework;
  • Access to finance for innovators, as testing in the sandbox gives investors reassurance regarding the regulatory certainty of the firms they are considering investing in;
  • Enabling investors to test ideas, by allowing products to be tested and introduced to the market, and so giving innovators the opportunity to understand how receptive consumers are to different pricing strategies, communication channels, business models and to the new technologies themselves; and
  • The opportunity for the FCA to work with innovators to build appropriate consumer protection safeguards into new products and services, for example by putting in place bespoke safeguards where needed.

Sandbox users

The FCA report provides an overview of the types of firm which have used the sandbox and the technologies they have been testing. Although a wide variety of firms are using the sandbox, a majority so far have been in the retail banking sector and are start-ups not yet authorized by the FCA. There is also a move to more applications to the sandbox from firms operating outside London. Most firms who enter the sandbox are trialing a new technology, of which Distributed Ledger Technology is the most widespread. Other technologies which have been tested relate to platform automation, APIs, biometrics and access tools.

Initiatives coming out of the sandbox

Although there are many different initiatives coming out of the sandbox, there are some common themes:

  • Many firms are looking to automate existing processes, cutting cost and increasing speed. For example, ideas have included automating the IPO documentation process, automating the issuance of debt, and automating money transfers in line with particular rules designed to encourage saving.
  • Firms are looking to use technology to provide a more tailored experience for customers, for example through robo-advice platforms.
  • Many firms are looking to give customers greater control, for example greater oversight of their finances and allowing payments to be made using biometrics.

How we can help

Eversheds Sutherlands has a team of regulatory and commercial FinTech specialists. We have helped both start-ups and established firms enter and work in the sandbox. Please contact us if you would like further information.