Financial Services Regulation Committee
Wednesday 28th October 2026
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10:02
Baroness Noakes
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Baroness Noakes
Welcome to today's meeting, which is the second oral session as part of the committee's inquiry into regulatory sandboxes. And I thank you, Miss Wallace, very much for attending. This session is open to the public. It's broadcast live and subsequently accessible via the parliamentary website. The verbatim transcript will be taken of the evidence and will will also be put on the parliamentary website. So, Miss Wallace, if I could ask you to introduce yourself for the record, and I believe you'll be making a few opening remarks and then we'll move into questions.
Yes.
Yes.
10:03
Speaker 1
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Speaker 1
Thank you very much, chair. So I was responsible for establishing the FCA's original regulatory sandbox back in 2016, and I led it until 2020. I now lead the centre for finance, Innovation and Technology, also known as See Fit, which was established following the Khalifa review to help turn financial innovation into practical, scalable solutions. And that was funded by the Treasury and the City of London. The original sandbox was designed to promote competition in the interests of consumers, and actually that was shorthand for consumers and users of markets as well, while maintaining appropriate safeguards. But our ambition was broader than regulatory experimentation alone.
In 2015, we also recommended an industry led sandbox, recognising that some of the barriers. Excuse me, to innovation were not regulatory. They related to access to data infrastructure and the ability for firms to collaborate. That initiative did not materialise. One lesson was that building that technical infrastructure is not enough. Industry needs to engage on the problem it wants to solve and commit to working together. This is the approach that fit that I lead takes today. Our coalitions bring together industry, regulators and government to tackle shared challenges, develop and test minimum viable products. That's prototypes and small scale products, and build an evidence and build the evidence.
Excuse me. Needed to for wider adoption. Ten years on, I see two opportunities. First, to evaluate the sandbox against its original objectives. Looking at its long term impact on competition and consumer outcomes, and secondly, to revisit how industry led experimentation can complement this regulatory sandbox and support market wide adoption. Thank you.
In 2015, we also recommended an industry led sandbox, recognising that some of the barriers. Excuse me, to innovation were not regulatory. They related to access to data infrastructure and the ability for firms to collaborate. That initiative did not materialise. One lesson was that building that technical infrastructure is not enough. Industry needs to engage on the problem it wants to solve and commit to working together. This is the approach that fit that I lead takes today. Our coalitions bring together industry, regulators and government to tackle shared challenges, develop and test minimum viable products. That's prototypes and small scale products, and build an evidence and build the evidence.
Excuse me. Needed to for wider adoption. Ten years on, I see two opportunities. First, to evaluate the sandbox against its original objectives. Looking at its long term impact on competition and consumer outcomes, and secondly, to revisit how industry led experimentation can complement this regulatory sandbox and support market wide adoption. Thank you.
10:05
10:05
Speaker 1
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Speaker 1
Yes. Thank you very much. So the see fit interacts more broadly with the regulator in a range of ways. They are involved in our coalitions. So that can involve anything from identifying market failures around innovation areas where industry could lead action. And also thinking about some of the recommendations that may come out of this coalition work. They are less involved but can have oversight in some of the prototyping that industry can do together. We will always inform them of it, but they're not actively involved. They are much more kind of commercial conversations that take place.
However, what we've seen in in developing the Fit model and it is still relatively new itself, is actually there is a pathway from the Fit coalition's into the FCA's regulatory sandbox. And we have one example now. We've been we were commissioned by the Treasury and the Khalifa Review to look at corporate digital identity, open finance and SME access to finance. And one of those coalitions, company digital ID, we've identified probably a consortia is a better word of market actors who will be testing the a novel way or a digital way of verifying both a company, its directors and the activities that carries out through corporate digital verification ecosystem that involves banks.
It also involves some players who work as orchestrators of that data, and it also works with companies who do the front end engaging with consumers. And so what we've been able to do is bring together a proposition that isn't just one firm. It is a range of firms that are looking at how a novel ecosystem, for want of a better word, could work. And then and so the FCA have agreed to take that sandbox forward. So it's a collection of firms, I think probably six firms in that group who will be testing collectively the use of this novel approach to identity of companies.
However, what we've seen in in developing the Fit model and it is still relatively new itself, is actually there is a pathway from the Fit coalition's into the FCA's regulatory sandbox. And we have one example now. We've been we were commissioned by the Treasury and the Khalifa Review to look at corporate digital identity, open finance and SME access to finance. And one of those coalitions, company digital ID, we've identified probably a consortia is a better word of market actors who will be testing the a novel way or a digital way of verifying both a company, its directors and the activities that carries out through corporate digital verification ecosystem that involves banks.
It also involves some players who work as orchestrators of that data, and it also works with companies who do the front end engaging with consumers. And so what we've been able to do is bring together a proposition that isn't just one firm. It is a range of firms that are looking at how a novel ecosystem, for want of a better word, could work. And then and so the FCA have agreed to take that sandbox forward. So it's a collection of firms, I think probably six firms in that group who will be testing collectively the use of this novel approach to identity of companies.
10:07
10:07
Speaker 1
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Speaker 1
So the coalitions are open in terms of who can join the coalition. There are tests that we will there is due diligence that we will take undertake in those coalitions in terms of have they got the capability? Are they interested in public value? So out of see fit, one of the things everyone has to sign up to is that the outcome of the work is a public good. So not all participants are interested in in that and that they are strategically aligned with the public policy goals, i.e. the corporate digital verification and enabling financial innovation.
10:08
10:08
10:08
Speaker 1
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Speaker 1
They would be they're not whole swathes of companies. So the first would be a company that isn't interested in the coalition. So it isn't interested in the topic. The second might be that they have a commercial interest that they don't want to engage with. This, you know, collaborative effort. So they may not want to get involved. Another may be that they are not aware of the work as well. As much as we try to publicize the work and be open in terms of firms engaging with us. I'm quite sure there are some entities who may not have heard of us.
We're only three years old who have not engaged with with see fit.
We're only three years old who have not engaged with with see fit.
10:09
Lord Lilley
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Lord Lilley
Thank you. My question is prompted by lady Lily, who asked me this morning when I said I was going to discuss sandboxes, what a sandbox is, and I was unable to explain it to her because no one has ever given me a concrete example. And not of your coalitions, but of basic sandbox. What happens to someone say, I've just admitted this new product, a digitalized pension or something? Yes. Could you take us through the steps of what it involves, please?
10:09
Speaker 1
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Speaker 1
Absolutely. I can take you through the steps as I knew them. So I think it's fair to say things have evolved. There are there is no such thing as one regulatory sandbox. Many have have been spawned since since that time. But I can talk to you through the original concept. The original concept was that after the great financial crisis, there was a significant reluctance to bring innovation into financial services. We saw a number of drivers for that. We saw , actually, the regulator was hesitating in allowing new innovations into the market because what had happened under the financial financial crisis, we saw small entry firms.
So these are startups struggling to get access to capital. When they said, I've got this great innovation to venture capitalists, please fund it. And they said, well, what markets and financial services? And we saw the VC, you know, looking to markets that were potentially less regulated as more attractive ways. And we saw also large firms reluctant to develop new products based on what had happened as a result of the financial crisis. So that was the context within which we were operating. Our goal was to encourage greater innovation in the interests of consumers. So that was what we were looking to do.
And in the original concept, we devised a number of approaches that we could take. So we said for small firms, we could try to get them to market quicker than going through a normal authorisation process. So that was the tool of restricted permission. So that enabled them to not go through the full licensing process or authorisation process, but they could go through what we called a limited permission process, a restricted permission, which said you are allowed to operate in the market with real customers under certain conditions for a limited period of time. And at that point, we will consider whether we can give you full authorisation or whether whether you don't get full authorisation.
And to be honest, the firms had that choice as well. So that was the limited permission route that enabled them to get into the market quickly, in a restricted way to prove both to us as a regulator and to their investors, that this actually could work within a regulated sphere. And I think by far that was the most used in my time. We were also able to give individual guidance to firms so they could again, they're in the sandbox. They're still the core. The core concept is that they're testing with real customers what they're doing, but they may need a range of tools to enable them to do that.
So the other tool to enable them to do that would be guidance, and that would be individual guidance to that firm. About the application of FCA rules and guidance specifically to that context. So there was no need for that firm to take general rules and guidance and try to interpret it within the specific context. The third was a no action letter, which basically was around, I guess, the concept of safe harbor. When firms, large firms, say we need safe harbour to operate safe harbour, it's called. It's an industry term. I don't think it's really used by regulators.
And so we we developed a no action, no enforcement action letter approach. That one we actually did take from the US Cfpb, who actually did come up with the concept of a sandbox before the FCA, but I don't think it was used by the Cfpb and it wasn't really used by us. So the point is they can test with real customers this innovation. They can get regulatory feedback. The devices to enable them to do that were were broadly speaking, authorisation, licensing policy, individual guidance or enforcement, no enforcement action letter. And so they were able to carry out that test.
I think I should impress upon you the significant evaluation and due diligence that the team would do and input into that test. So often, what we found was firms didn't necessarily consider upfront the impact on consumers. So we would often build in protections for consumers for that test. So it was an opportunity to test out a business model with real consumers, which, you know, in lots of unregulated markets is not something you need help with. But in a market like financial services, in the wake of the great financial crisis, this was felt like an intervention that was needed to support innovation, get into the market.
So these are startups struggling to get access to capital. When they said, I've got this great innovation to venture capitalists, please fund it. And they said, well, what markets and financial services? And we saw the VC, you know, looking to markets that were potentially less regulated as more attractive ways. And we saw also large firms reluctant to develop new products based on what had happened as a result of the financial crisis. So that was the context within which we were operating. Our goal was to encourage greater innovation in the interests of consumers. So that was what we were looking to do.
And in the original concept, we devised a number of approaches that we could take. So we said for small firms, we could try to get them to market quicker than going through a normal authorisation process. So that was the tool of restricted permission. So that enabled them to not go through the full licensing process or authorisation process, but they could go through what we called a limited permission process, a restricted permission, which said you are allowed to operate in the market with real customers under certain conditions for a limited period of time. And at that point, we will consider whether we can give you full authorisation or whether whether you don't get full authorisation.
And to be honest, the firms had that choice as well. So that was the limited permission route that enabled them to get into the market quickly, in a restricted way to prove both to us as a regulator and to their investors, that this actually could work within a regulated sphere. And I think by far that was the most used in my time. We were also able to give individual guidance to firms so they could again, they're in the sandbox. They're still the core. The core concept is that they're testing with real customers what they're doing, but they may need a range of tools to enable them to do that.
So the other tool to enable them to do that would be guidance, and that would be individual guidance to that firm. About the application of FCA rules and guidance specifically to that context. So there was no need for that firm to take general rules and guidance and try to interpret it within the specific context. The third was a no action letter, which basically was around, I guess, the concept of safe harbor. When firms, large firms, say we need safe harbour to operate safe harbour, it's called. It's an industry term. I don't think it's really used by regulators.
And so we we developed a no action, no enforcement action letter approach. That one we actually did take from the US Cfpb, who actually did come up with the concept of a sandbox before the FCA, but I don't think it was used by the Cfpb and it wasn't really used by us. So the point is they can test with real customers this innovation. They can get regulatory feedback. The devices to enable them to do that were were broadly speaking, authorisation, licensing policy, individual guidance or enforcement, no enforcement action letter. And so they were able to carry out that test.
I think I should impress upon you the significant evaluation and due diligence that the team would do and input into that test. So often, what we found was firms didn't necessarily consider upfront the impact on consumers. So we would often build in protections for consumers for that test. So it was an opportunity to test out a business model with real consumers, which, you know, in lots of unregulated markets is not something you need help with. But in a market like financial services, in the wake of the great financial crisis, this was felt like an intervention that was needed to support innovation, get into the market.
10:14
10:14
Speaker 1
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Speaker 1
One of the things we would do as part of the licensing was part of the test, is we would think about the potential consumer harm that could be caused. So there are a number of interventions we could make at that point. We could determine what types of consumers were engaged. So for example, we could say only sophisticated investors, you know, we could we could say investors who already have done this before. So, you know, have practiced this before. So we, we introduced a number of interventions to prevent that from happening, I think is the first point.
But this was not a risk free environment. And so we would also think about the harm that could be caused by consumers from that very specific product for that very specific test. And we would often require the company to hold effectively a pot of money for compensation for any consumers that were involved in that test. And we would decide with the company what that compensation might be. It may be the consumers may toll, it may be something over and above the consumer being told from the from the failure. So that was and if they couldn't if they couldn't do that, because obviously that was effectively a form of regulatory capital we were asking them to hold.
Then they weren't able to to test the product.
But this was not a risk free environment. And so we would also think about the harm that could be caused by consumers from that very specific product for that very specific test. And we would often require the company to hold effectively a pot of money for compensation for any consumers that were involved in that test. And we would decide with the company what that compensation might be. It may be the consumers may toll, it may be something over and above the consumer being told from the from the failure. So that was and if they couldn't if they couldn't do that, because obviously that was effectively a form of regulatory capital we were asking them to hold.
Then they weren't able to to test the product.
10:15
10:15
Lord Eatwell
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Lord Eatwell
I'm intrigued by the fact that the idea of the sandbox, I suppose, was about 20 years old, something like that. I don't mean the FCA one, I mean in general. And yet somehow it's the whole concept has not been seen as a success. And for example, can we can we identify some extraordinary innovations which have come through the sandbox process? I can't think of any. I'm I'm sure there may be some. And I'm wondering whether the problem is that the very nature of the sandbox is to present new ideas and new ways of doing things, and to test them with the regulator.
And people get sensitive about what they deem to be commercially sensitive information. And for example, I'm struck that you talked about groups of companies doing things. Now that already suggests some form of competitive, strange, competitive or anti-competitive relationship between them and. AM I right in thinking that this is a problem with the I mean, the concept seems to be a great idea. You know, there's innovation going on. Innovation was expensive. You tested out with regulator so that you don't spend an enormous amount of money and then have your legs cut off the you finally introduce whatever the new product might be.
Very sensible idea, but it hasn't really taken off, has it? Or am I? Do I have a false perception in this respect?
And people get sensitive about what they deem to be commercially sensitive information. And for example, I'm struck that you talked about groups of companies doing things. Now that already suggests some form of competitive, strange, competitive or anti-competitive relationship between them and. AM I right in thinking that this is a problem with the I mean, the concept seems to be a great idea. You know, there's innovation going on. Innovation was expensive. You tested out with regulator so that you don't spend an enormous amount of money and then have your legs cut off the you finally introduce whatever the new product might be.
Very sensible idea, but it hasn't really taken off, has it? Or am I? Do I have a false perception in this respect?
10:17
Speaker 1
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Speaker 1
I think I think probing that is incredibly important. In between my time at the FCA and at the centre for finance, Innovation and Technology, I joined the Gates Foundation to help them think about expanding digital financial services into emerging markets. And many said, let's just industrialize sandboxes. And in fact, that was already underway by the time I joined the Gates Foundation. But it clearly was not an appropriate regulatory tool for the challenges that those regulators were facing. They were they had innovations coming into their marketplace that were being, you know, that were including 23 million customers a year.
I said, well, the problem are sandboxes we're trying to solve was that there were innovations, but there was no customer acquisition. So it was a very different context that we were trying to apply. So I think you are right to question the validity and the, the market impact of, of the regulatory sandboxes and myself have been reflecting on that since I was asked to come to this committee. I think, you know, for me, we looked at, you know, our measurement of success was around these firms coming into the market and the impact on the consumers of that.
That was very early days. I think the 2017 Lessons Learned report that we published attempted to engage with the market on how we saw success. But obviously at that point, that was very short term, firm level outcomes in terms of attributing the work of the regulatory sandbox to broader market outcomes and broader consumer outcomes. I think there are still some questions to be answered that I believe a longitudinal study could be very helpful in not just the UK, but the global understanding of how and where these tools can be beneficial to financial innovation and the outcome for consumers and markets.
I said, well, the problem are sandboxes we're trying to solve was that there were innovations, but there was no customer acquisition. So it was a very different context that we were trying to apply. So I think you are right to question the validity and the, the market impact of, of the regulatory sandboxes and myself have been reflecting on that since I was asked to come to this committee. I think, you know, for me, we looked at, you know, our measurement of success was around these firms coming into the market and the impact on the consumers of that.
That was very early days. I think the 2017 Lessons Learned report that we published attempted to engage with the market on how we saw success. But obviously at that point, that was very short term, firm level outcomes in terms of attributing the work of the regulatory sandbox to broader market outcomes and broader consumer outcomes. I think there are still some questions to be answered that I believe a longitudinal study could be very helpful in not just the UK, but the global understanding of how and where these tools can be beneficial to financial innovation and the outcome for consumers and markets.
10:19
Lord Eatwell
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Lord Eatwell
Yes. And that was the other thing that puzzled me in your initial statement, which was this emphasis on benefit for the consumer. Yes, because a lot of innovations have, of course, taken place in market infrastructure and in wholesale markets, and yet they can affect the consumer. For example, the innovation of credit default swaps transformed the mortgage market and therefore transform the experience of the consumer, that nobody would have thought that credit default swaps would have something to do with consumers. They were clearly a wholesale market product. So isn't that a how do you define what's good for a consumer, whether a product is consumer related, whether it's directly sold to consumers or whether it will affect the consumer indirectly, as credit default swaps did?
10:20
Speaker 1
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Speaker 1
Yeah, I think that's an excellent question. I think the look through is often missed. You know, we can often index on what a particular sector does or delivers. But I think in terms of how the whole of the market has evolved in response to that, I mean, certainly when we we did a number of wholesale propositions, I think in particular, as crypto was coming into the market. I think at that point it was called Bitcoin and cryptocurrency. What the regulatory sandbox was able to do was able to say, actually, we think the benefit probably comes from market infrastructure around the distributed ledger technology.
And we were able to use the sandbox trials to then inform a piece of policy work, which was around crypto assets and its interaction with MiFID. The Market Infrastructures directive as it was then, now is obviously a piece of UK legislation. So but but I think the point you're making is a really good one. And I don't have the evidence to give you which says, okay, so if if the market, you know, structure changed and enabled certain kinds of activity in the wholesale market, what impact did that have writ large on the financial services? And what does that mean for the end consumer in that circumstance?
We could talk to and we often talk to access to access to financial instruments, direct to retail consumers. That was one of the claims by these innovators that it could disintermediate banks and brokers, and that would be more efficient. So it was also a way of trying to cut through the rhetoric of innovators and really understand whether that was a feasible claim to be made.
And we were able to use the sandbox trials to then inform a piece of policy work, which was around crypto assets and its interaction with MiFID. The Market Infrastructures directive as it was then, now is obviously a piece of UK legislation. So but but I think the point you're making is a really good one. And I don't have the evidence to give you which says, okay, so if if the market, you know, structure changed and enabled certain kinds of activity in the wholesale market, what impact did that have writ large on the financial services? And what does that mean for the end consumer in that circumstance?
We could talk to and we often talk to access to access to financial instruments, direct to retail consumers. That was one of the claims by these innovators that it could disintermediate banks and brokers, and that would be more efficient. So it was also a way of trying to cut through the rhetoric of innovators and really understand whether that was a feasible claim to be made.
10:22
10:22
10:22
Lord Eatwell
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Lord Eatwell
And it hasn't really worked, has it? And and that's the puzzle. And and that's where I go back to my initial point about commercially sensitive information or whatever, I'm trying to work out why it hasn't worked. Are there are there any other thoughts, given that you're in this position now, which looks across the industry, you have any other thoughts as to why it hasn't really worked?
10:22
Speaker 1
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Speaker 1
It hasn't worked. I, I think it's a I think it's a it's a good question to ask. I think there is some emerging evidence that shows that there are elements that have worked, for example, even just my own perspective in the market, working for the centre for finance, Innovation and Technology. When I set up the regulatory sandbox, the banks wouldn't even engage. You know, they, they wouldn't I mean, they effectively saw it as a way to bring in intelligence that we would take enforcement action against. That was their attitude. Whereas now the centre for finance, Innovation and Technology has broad engagement from banks who are now engaging with the regulatory sandbox.
So I think there is , you know, and I think similarly, if you look at market sentiment and I appreciate the perspective on market sentiment, that there was a sense that actually the regulator was attempting to support financial innovation. I mean, I think you've seen the evidence, so I don't want to labour the point around did they get did they get into market quicker? Yes they did. Were they able to get access to greater funding? Yes they were.
That was evaluated by the Bank of International Settlements as well. Were the consumer safeguards.
So I think there is , you know, and I think similarly, if you look at market sentiment and I appreciate the perspective on market sentiment, that there was a sense that actually the regulator was attempting to support financial innovation. I mean, I think you've seen the evidence, so I don't want to labour the point around did they get did they get into market quicker? Yes they did. Were they able to get access to greater funding? Yes they were.
That was evaluated by the Bank of International Settlements as well. Were the consumer safeguards.
10:24
10:24
Speaker 1
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Speaker 1
It is, but only on the firm side. I see. So that that is a really. I think that's a really important, credible piece of work that I think could be. I mean, the BIS may not want to go into impact on consumer. That's not really their bag. But they looked at the counterfactuals. They looked at those who came in and those who didn't get in, and they compared the two cohorts, which is a you know, it was a really exciting piece of work. And that is that's a fundamental cornerstone of why other countries have copied it.
10:24
10:24
Baroness Donaghy
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Baroness Donaghy
Thank you, Lord chairman. Like Lord Eastwell, I was intrigued by your initial statement that in a sense, the sandbox is a methodology and there are other things that are necessary to achieve what the initial intention was. I hope I'm not putting words in your mouth, but it seems to me what you're doing now is more about culture change, cooperation, building trust, which is a bit more difficult to sort of get your get your teeth into, but it may lead to a bit more progress in this area. But the original intention, we keep hearing about the cost, that it's a very high cost to an applicant to come in to the sandbox and get their proposal considered.
And can you confirm or deny that cost is a big factor? And also, of course, the cost to the FCA, presumably, but also how you avoid the favoured applicant. Is there evidence that those who succeed in this experiment actually also received funding, which an unsuccessful company wouldn't? Which comes first?
And can you confirm or deny that cost is a big factor? And also, of course, the cost to the FCA, presumably, but also how you avoid the favoured applicant. Is there evidence that those who succeed in this experiment actually also received funding, which an unsuccessful company wouldn't? Which comes first?
10:26
10:26
Speaker 1
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Speaker 1
I think, but please correct me if I get the last one wrong. One of the. In this 2017 Lessons Learned report that I talked to and we tried to set that up in a, in a, as a myth, you know, in a, in a way that could be continued through the years and you would begin to get a greater sense of market impact. One of the one of the indicators was reducing time and cost to market. And that was a specific cost to firm to ask. The counterfactual of that was twofold. At that point, I think there are more ways to get into the market today than there were ten years ago.
The first was being directly authorised by the FCA, which has a cost, you know, to to get authorised, but also the cost of developing the application and understanding the requirements of the regulator. The second was an appointed representative regime as well, which was where a firm maybe wasn't big enough, and it only exists in some markets, but where a firm is able to be licensed to operate through another party that's regulated. This is quite common in the adviser market. So we compared what it cost for the cohorts that had come through the sandbox to that point in comparison to those counterfactuals, and had found that we had reduced that cost.
I think that's an important test for the sandbox. And may as market conditions change, as regulatory models change, that, that may have to be recalibrated over time. We don't necessarily it's not it's there's not one cost of getting into the market. So I think that is something worthwhile. But I can't confirm or deny that through my, my role at, at CFA, we were very closely monitored in terms of our costs. I think there was a freedom of information, but I think we put out our costs as well. For the regulatory sandbox. We were very conscious of whether that met the the balance, and we did that through our audit co and board.
At that point, we were satisfied against the lessons learned report that it was there was a public good and a public value and that it met. And this is the point which is so incredibly important, which I think, Lord, eat well made, which is this is about the regulatory risks to innovation. This isn't, you know, just the FCA can't do anything or everything to support innovation, nor would we want it to. I actually think it's it's a hierarchical, bureaucratic, independent regulator. We don't want it driving all innovation. I think we'd be in a poor position in the UK for that.
So I haven't reviewed the current cost of the regulatory sandbox and how that compares to outcomes. So I wouldn't be able to give a position. But all I can say is that it was something that was constantly monitored. And then on the anti-competitive side. And so I think what I think what you're saying is, could the benefit of those that get into the sandbox be unfair that the regulator is providing an unfair support? This this was something we were very conscious of. Our prior, when we went into it, was that innovators were at a disadvantage, and they were at a disadvantage in a number of ways.
From a licensing perspective, if I was doing something quite common, I would have probably some guidance that told me how to apply. I would have people who worked in that licensing department who knew exactly what to do and had, you know, guidance and practice best practice to do that. I probably had some policy out there that helped me, some guidance that helped me think about how to apply it. And I probably. So that was one of the kind of anti-competitive measures that we reflected on ourselves, actually, as the FCA actually is how we approach policy making, guidance making and licensing having a perverse effect.
So it was intended to redistribute that. And then the support for small companies, we actually and whether the banks will always agree with this perspective. But at the time, we viewed that having a supervision team could actually be helpful because you would have a big team that could answer your questions about whether this product or that product or doing it this way or that way. So you could get this kind of informal advice. So we felt also that the sandbox could support those small companies that didn't have that close contact with the regulator , where they were doing something innovative.
So we saw it as a means of redistributing unfairness. But you are absolutely correct that where that line is constantly does need to be monitored and evaluated. So on an ongoing basis, I think it's a very, you know, exceptionally good point to make.
The first was being directly authorised by the FCA, which has a cost, you know, to to get authorised, but also the cost of developing the application and understanding the requirements of the regulator. The second was an appointed representative regime as well, which was where a firm maybe wasn't big enough, and it only exists in some markets, but where a firm is able to be licensed to operate through another party that's regulated. This is quite common in the adviser market. So we compared what it cost for the cohorts that had come through the sandbox to that point in comparison to those counterfactuals, and had found that we had reduced that cost.
I think that's an important test for the sandbox. And may as market conditions change, as regulatory models change, that, that may have to be recalibrated over time. We don't necessarily it's not it's there's not one cost of getting into the market. So I think that is something worthwhile. But I can't confirm or deny that through my, my role at, at CFA, we were very closely monitored in terms of our costs. I think there was a freedom of information, but I think we put out our costs as well. For the regulatory sandbox. We were very conscious of whether that met the the balance, and we did that through our audit co and board.
At that point, we were satisfied against the lessons learned report that it was there was a public good and a public value and that it met. And this is the point which is so incredibly important, which I think, Lord, eat well made, which is this is about the regulatory risks to innovation. This isn't, you know, just the FCA can't do anything or everything to support innovation, nor would we want it to. I actually think it's it's a hierarchical, bureaucratic, independent regulator. We don't want it driving all innovation. I think we'd be in a poor position in the UK for that.
So I haven't reviewed the current cost of the regulatory sandbox and how that compares to outcomes. So I wouldn't be able to give a position. But all I can say is that it was something that was constantly monitored. And then on the anti-competitive side. And so I think what I think what you're saying is, could the benefit of those that get into the sandbox be unfair that the regulator is providing an unfair support? This this was something we were very conscious of. Our prior, when we went into it, was that innovators were at a disadvantage, and they were at a disadvantage in a number of ways.
From a licensing perspective, if I was doing something quite common, I would have probably some guidance that told me how to apply. I would have people who worked in that licensing department who knew exactly what to do and had, you know, guidance and practice best practice to do that. I probably had some policy out there that helped me, some guidance that helped me think about how to apply it. And I probably. So that was one of the kind of anti-competitive measures that we reflected on ourselves, actually, as the FCA actually is how we approach policy making, guidance making and licensing having a perverse effect.
So it was intended to redistribute that. And then the support for small companies, we actually and whether the banks will always agree with this perspective. But at the time, we viewed that having a supervision team could actually be helpful because you would have a big team that could answer your questions about whether this product or that product or doing it this way or that way. So you could get this kind of informal advice. So we felt also that the sandbox could support those small companies that didn't have that close contact with the regulator , where they were doing something innovative.
So we saw it as a means of redistributing unfairness. But you are absolutely correct that where that line is constantly does need to be monitored and evaluated. So on an ongoing basis, I think it's a very, you know, exceptionally good point to make.
10:31
Lord Sharkey
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Lord Sharkey
I think in your opening statement, you mentioned that the FCA hasn't published an updated analysis of the sandbox impact since 2017. I wonder why that is. And I wonder also why there aren't any cost benefit analysis available for us to look at. And the question arises of in the absence of Cbas, for example, how are the learnings from sandboxes distributed or shared amongst those outside the sandbox and in particular consumers? Yeah.
10:31
Speaker 1
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Speaker 1
Yes. Yeah. I think potentially my my opening statement was not intended to say that's been the only evaluation of it. It is the evaluation on the original concept as I knew it. I believe since then there have been reports, I think the ten year, ten years since the regulatory sandbox has provides insights. I think there has been a range of ways that the FCA has reported on the progress of the sandbox and evaluation of the sandbox. This is the one for me that relates most closely to the original intentions of it, and one that I see could could be the basis of a longitudinal study on a market, broader market impact and consumer outcomes.
Sorry. Excuse me. The second question was.
Sorry. Excuse me. The second question was.
10:32
10:32
Speaker 1
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Speaker 1
Yes. So there are a range of ways to ensure, I guess, transparency is probably the there was the publishing of anyone who was in the sandbox and the, the concept of the trial. So there was always a publication of who was in it and what they were doing. And there was a publication on publications on. And I can provide you with further details on the. I don't have it in my mind, sorry. The results of cohorts and that's. There were cohorts. So we were able to give broad range of, of outcomes. And then as a result of that and themes, I guess as a result of that, there was also consideration of whether regulatory intervention was required off the back of that.
And, and at that point, that's where something like a cost benefit analysis would be triggered, because that would be a necessary part of policy making or making guidance. But as the regulatory sandbox was a kind of operational function as opposed to a, you know, a part of the legislative framework, there was not a cost benefit analysis. The 2017 report was intended to be an attempt to, to, to look at what we normally would from a cost benefit analysis.
So it's a CBA by proxy.
And, and at that point, that's where something like a cost benefit analysis would be triggered, because that would be a necessary part of policy making or making guidance. But as the regulatory sandbox was a kind of operational function as opposed to a, you know, a part of the legislative framework, there was not a cost benefit analysis. The 2017 report was intended to be an attempt to, to, to look at what we normally would from a cost benefit analysis.
So it's a CBA by proxy.
10:34
Lord Sharkey
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Lord Sharkey
Or any learnings from these sandboxes that end up being proprietary. In other words, restricted to the outside. I mean, obviously what we're worried about, what things we're worried about, is the creation of unfair advantage by presence in the sandbox. And there's a slight logical paradox in all this, because.
10:34
10:34
10:34
10:34
Speaker 1
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Speaker 1
And I think I mean, really, I don't think individual it's certainly individual guidance wasn't a huge part of the regulatory sandbox. That being said, you know, there are there was feedback, regulatory feedback, I think the term or informal guidance that was given. So I think I think to say that there wasn't any information provided to that firm that could have been useful. I think it's probably unfair, however, where there were the test, there was a test of would this be useful to the rest of the market? And if so, how? What's the what's the approach to get it out into the marketplace?
The. Probably the one example I would give is on the robo advice function, where this came out of the Financial Advice markets review from, I think it was a cross policy from the Treasury, the FCA and the Bank of England, which identified that there was additional support required for entities that were looking to bring. There are many terms for this. So apologies if I'm crude and I'm not totally accurate, but this kind of limited advice for consumers. At that point it was robo advice because that was a very long it was a long time before we knew what AI could do.
And that was guidance that we identified that actually, because being on the wrong side of the advice guidance boundary was so significant that we provided independent advice. No. Yes, yes.
The. Probably the one example I would give is on the robo advice function, where this came out of the Financial Advice markets review from, I think it was a cross policy from the Treasury, the FCA and the Bank of England, which identified that there was additional support required for entities that were looking to bring. There are many terms for this. So apologies if I'm crude and I'm not totally accurate, but this kind of limited advice for consumers. At that point it was robo advice because that was a very long it was a long time before we knew what AI could do.
And that was guidance that we identified that actually, because being on the wrong side of the advice guidance boundary was so significant that we provided independent advice. No. Yes, yes.
10:36
10:36
10:37
Speaker 1
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Speaker 1
I think, you know, in a market as deep as the UK's and as complex as the UK's, I would be amazed that there would be one silver bullet that unlocked all activity, you know, and ultimately where this was targeted at was, was trying to find where the flowers bloomed and bringing that up to the next level. So I think what we need to look to is the association of what came through the sandbox. I think cryptoassets is a very good example, where there was really no other way for us as a regulator to get our hands on what people were talking about.
Ultimately, it was seen as an unregulated activity, and it was the first place where really we could begin to see that that has then, you know, there were a number of wholesale share certificate experiments that were taken. That is the early days of what we have at the moment in terms of the wholesale market, digital Champions review. So I think the question is not. Is not necessarily did nothing come from it, but why is it not happening fast enough and at the scale that we need to. And that's why for me, working at Sefa is incredibly important because I think there are some missing elements in terms of trust and collaboration that a sandbox and that kind of market infrastructure piece that a sandbox doesn't necessarily unlock.
It shows the potential at a product or firm level, but we also need to think about, okay, so to enable that to scale, what market infrastructure do we need to, to, to really get that to the next level and to get that into the hands of consumers and users of financial markets.
Ultimately, it was seen as an unregulated activity, and it was the first place where really we could begin to see that that has then, you know, there were a number of wholesale share certificate experiments that were taken. That is the early days of what we have at the moment in terms of the wholesale market, digital Champions review. So I think the question is not. Is not necessarily did nothing come from it, but why is it not happening fast enough and at the scale that we need to. And that's why for me, working at Sefa is incredibly important because I think there are some missing elements in terms of trust and collaboration that a sandbox and that kind of market infrastructure piece that a sandbox doesn't necessarily unlock.
It shows the potential at a product or firm level, but we also need to think about, okay, so to enable that to scale, what market infrastructure do we need to, to, to really get that to the next level and to get that into the hands of consumers and users of financial markets.
10:38
10:38
10:38
Lord Hollick
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Lord Hollick
One radical agent of change in the financial services market is the rapid adoption of AI. It's reshaping the relationship between the consumer and the producer of financial services. It is posing very significant questions to the regulator. How does it regulate AI? And with a agentic AI coming into the market as well, the whole relationship and the whole regulatory basis upon which the market operates, financial services market operates is being changed.
What is the sandbox doing to investigate this and to make recommendations as to about how AI should be regulated?
What is the sandbox doing to investigate this and to make recommendations as to about how AI should be regulated?
10:39
10:40
Speaker 1
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Speaker 1
I mean, I guess I, well, I would always think about as I was preparing for this, thinking of it in three ways, which is what can I'm not saying the sandbox isn't the regulator, but of course it is. But there's a kind of what does industry need? What does government need to do? What does. What do the regulators need to do? What does industry need to do? That's the way I always think about it and that relationship and what those various players need to do changes as the innovation, you know, from the very nascent to the point at which, you know, we are it's systemically important what different players need to do alters throughout that innovation life cycle.
I mean, I think globally the FCA would be recognised as being very on the front foot when it comes to artificial intelligence. And I think they have sought to adopt the regulatory sandbox model to think about what is required from artificial intelligence. So I think from that context, you know, they have tried to evolve and adapt the offering for the needs of artificial intelligence, but that's obviously only limited to that innovation service. I think from my perspective, you know, the trusted AI adoption will need shared standards, assurance methods, data infrastructure, arrangements for identity, consent and liability.
And I think the sandbox, the FCA AI sandbox, as I, I think is going to give us some lessons and insight into what that might look like and what the market practices are. So it's an excellent way of us understanding what the regulatory risks are, what is likely to come into the marketplace. So I think it gives the public an exposure to what's happening in the market, and it enables the regulator to think about whether their rules, licensing permissions is appropriate or whether it's something that they need to alter. So it does inform policy making in a way that is more practical than potentially the normal policy making consultation process.
But I do. I think there are, you know, and I think they are very focused on through the Treasury, looking at agentic payments through AI initiatives as well. Again, that's a that's a policy intervention. That's not a regulatory intervention. So I think a sandbox intervention, what you're seeing is the regulator responding appropriately to what is required from a sandbox. What are the limits of what a sandbox can do and what, where a policy could support that? From my perspective, what I'm hearing from industry and this has come from the AI champions report to the Treasury, is that, look, there are things they can do and they are excited about the commercial opportunity, but there does need to be some standardization across the industry around assurance, use of data.
And I think the industry are quite willing to work together on this. There are a few players that are, you know, obviously trying to get ahead personally from a public value perspective. And y c fits interested is we want to see that. We want to see those that maybe don't have the level of investment required for these assurance models to, to benefit from that thinking, and for there to be a kind of UK approach that can protect consumers. I'm also concerned about SMEs in the UK as well. You know, if a genetic payments, whilst it's not a financial services issue, if financial services begin to adopt agents for payments, I'm concerned that UK SMEs that aren't necessarily engaged with that digital economy may lose out as well.
And I think, you know, I kind of see fit model that is looking at the public value of AI is thinking about, you know, catalysing the innovation, but doing it in a safe and sustainable way and thinking about where the winners might be and how to redistribute that, I think is a helpful precursor to potentially further regulation as well, or, or a sandbox. But I think whilst I think there are guardrails that are required, like any regulation of a market, understanding what can be done at an industry level first and then where, you know, where the regulatory intervention required, whether that be through a sandbox experimentation or through policy and guidance is a is a helpful way of us collaborating.
But, but for me, I see it as it has to be a joint effort from government, regulators and industry. It's not all sitting on a sandbox.
I mean, I think globally the FCA would be recognised as being very on the front foot when it comes to artificial intelligence. And I think they have sought to adopt the regulatory sandbox model to think about what is required from artificial intelligence. So I think from that context, you know, they have tried to evolve and adapt the offering for the needs of artificial intelligence, but that's obviously only limited to that innovation service. I think from my perspective, you know, the trusted AI adoption will need shared standards, assurance methods, data infrastructure, arrangements for identity, consent and liability.
And I think the sandbox, the FCA AI sandbox, as I, I think is going to give us some lessons and insight into what that might look like and what the market practices are. So it's an excellent way of us understanding what the regulatory risks are, what is likely to come into the marketplace. So I think it gives the public an exposure to what's happening in the market, and it enables the regulator to think about whether their rules, licensing permissions is appropriate or whether it's something that they need to alter. So it does inform policy making in a way that is more practical than potentially the normal policy making consultation process.
But I do. I think there are, you know, and I think they are very focused on through the Treasury, looking at agentic payments through AI initiatives as well. Again, that's a that's a policy intervention. That's not a regulatory intervention. So I think a sandbox intervention, what you're seeing is the regulator responding appropriately to what is required from a sandbox. What are the limits of what a sandbox can do and what, where a policy could support that? From my perspective, what I'm hearing from industry and this has come from the AI champions report to the Treasury, is that, look, there are things they can do and they are excited about the commercial opportunity, but there does need to be some standardization across the industry around assurance, use of data.
And I think the industry are quite willing to work together on this. There are a few players that are, you know, obviously trying to get ahead personally from a public value perspective. And y c fits interested is we want to see that. We want to see those that maybe don't have the level of investment required for these assurance models to, to benefit from that thinking, and for there to be a kind of UK approach that can protect consumers. I'm also concerned about SMEs in the UK as well. You know, if a genetic payments, whilst it's not a financial services issue, if financial services begin to adopt agents for payments, I'm concerned that UK SMEs that aren't necessarily engaged with that digital economy may lose out as well.
And I think, you know, I kind of see fit model that is looking at the public value of AI is thinking about, you know, catalysing the innovation, but doing it in a safe and sustainable way and thinking about where the winners might be and how to redistribute that, I think is a helpful precursor to potentially further regulation as well, or, or a sandbox. But I think whilst I think there are guardrails that are required, like any regulation of a market, understanding what can be done at an industry level first and then where, you know, where the regulatory intervention required, whether that be through a sandbox experimentation or through policy and guidance is a is a helpful way of us collaborating.
But, but for me, I see it as it has to be a joint effort from government, regulators and industry. It's not all sitting on a sandbox.
10:45
10:45
Lord Hollick
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Lord Hollick
Another innovation over the last ten years has been the advent of influencers who business model is to promote financial products for which they are assuming they're adopted. Yes. They're rewarded. They seem to sit outside . A lot of the regulatory perimeters. Is have you looked into the role of influencers, and have you any views, your organisation, have any view as to how their role should be properly regulated?
10:45
Speaker 1
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Speaker 1
It's not something we've looked at at in CFA, but I did lead the financial promotions team for a while at the FCA, so it was a big part of my job, and that's when Twitter was only just starting. And so we tried to capture as much as possible anyone that's doing anything for material gain. So regardless of its technology agnostic, regardless of the platform, regardless of whether it looks nice and friendly and cute, or it looks like an interview, if that person is doing it for financial, it's called by ways of by means of business.
They they are captured. But I think it's a. It was incredibly challenging at the time, both in terms of supervisory and enforcement to, to capture these people on these new platforms and the sheer volume of it. But, you know, observing what the FCA has done since I left, I, you know, they've been deploying AI tools to capture, you know, to, to get greater market understanding and intelligence. I haven't thought about whether what we could do from a regulatory sandbox perspective, but you are absolutely right. The, the digital economy and the drive of innovation and the use of these platforms is a, is certainly a kind of unique and complex and very fast moving risk to consumers walks.
They they are captured. But I think it's a. It was incredibly challenging at the time, both in terms of supervisory and enforcement to, to capture these people on these new platforms and the sheer volume of it. But, you know, observing what the FCA has done since I left, I, you know, they've been deploying AI tools to capture, you know, to, to get greater market understanding and intelligence. I haven't thought about whether what we could do from a regulatory sandbox perspective, but you are absolutely right. The, the digital economy and the drive of innovation and the use of these platforms is a, is certainly a kind of unique and complex and very fast moving risk to consumers walks.
10:47
Lord Vaux of Harrowden
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Lord Vaux of Harrowden
Thank you. In one sense, sandboxes have been incredibly successful in that they have been copied pretty much all over the world now. Can you tell us if there are any lessons we can learn from what other countries are doing in respect of sandboxes, where things are being done better, or perhaps being done worse, actually?
10:47
Speaker 1
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Speaker 1
I think I think what the UK has done incredibly well is to attach the sandbox to to the market failure and stay true to that. I think where other sandboxes have struggled and has been, it's about entry into market, and I think that's too broad. Might, might I add, it? Being well resourced has also been made it a more successful and productive function when compared with others. We you know, in the early days as we were honing. And that's continued and the, the offering, we saw in particular two examples where there was a need from.
Innovators to work across sectors. And that that actually with AI, I think that's where certainly from the coalitions that we've been working on, this cross-sector engagement from regulators is incredibly important. We're working on one at the moment on open property, which covers a range of regulated markets. So regulators working with each other on trials, which we called cross-sector sandbox, was an idea that we looked to. And then we also looked to international sandboxes or cross-border sandboxes. And I believe the lesson learned was they were both too early. I think the opposing, you know, the I think we were further ahead and we were better resourced.
I think the other point to make is comparisons are not always comparing like for like, so, you know, to me, often the FCA is likened to the monetary authority of Singapore in terms of success. They have a very different mandate when it comes to kind of economic growth, which the FCA is not able to. Whilst it has a new requirement, it is quite distinct. So sometimes those international comparisons are not not not not necessarily doing like for like, and potentially for the UK to deliver that kind of outcome. It would require government as well as the FCA.
So something like the Treasury's Office for Financial Investment or Investment, I believe is, is a response to that comparison.
Innovators to work across sectors. And that that actually with AI, I think that's where certainly from the coalitions that we've been working on, this cross-sector engagement from regulators is incredibly important. We're working on one at the moment on open property, which covers a range of regulated markets. So regulators working with each other on trials, which we called cross-sector sandbox, was an idea that we looked to. And then we also looked to international sandboxes or cross-border sandboxes. And I believe the lesson learned was they were both too early. I think the opposing, you know, the I think we were further ahead and we were better resourced.
I think the other point to make is comparisons are not always comparing like for like, so, you know, to me, often the FCA is likened to the monetary authority of Singapore in terms of success. They have a very different mandate when it comes to kind of economic growth, which the FCA is not able to. Whilst it has a new requirement, it is quite distinct. So sometimes those international comparisons are not not not not necessarily doing like for like, and potentially for the UK to deliver that kind of outcome. It would require government as well as the FCA.
So something like the Treasury's Office for Financial Investment or Investment, I believe is, is a response to that comparison.
10:50
10:50
10:51
Lord Vaux of Harrowden
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Lord Vaux of Harrowden
And just also on the international thing, just we were told, given the example last week in the evidence of Canada, where people go into the sandbox, they've got a sort of limited authorisation. They come to the end of that and it, rather than forcing them onto the full authorisation process, they end up with a sort of individual waiver that seems to last forever. Is that something that happens in this country as well?
10:51
Speaker 1
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Speaker 1
Or you can have waivers? I mean, that's a really good comparison. And I did you know, I did work with a number of countries on their regulatory sandboxes because, you know, sometimes they couldn't be persuaded otherwise. And some of the design questions that came to mind was, how long were you in the sandbox? How long were these interventions last? So I think the FCA, we were really mindful to keep it quite short, but a number of Indonesia's an example where you could be in the sandbox for a number of years and unlimited waivers was another example.
They all, you know, ultimately the sandbox was the purpose of it was to test whether it could operate in a regulated market. If a waiver is required ad infinitum, then the policy should be changed.
They all, you know, ultimately the sandbox was the purpose of it was to test whether it could operate in a regulated market. If a waiver is required ad infinitum, then the policy should be changed.
10:52
10:52
10:52
10:52
10:52
Lord Davies of Brixton
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Lord Davies of Brixton
Yes. And I'm wondering to what extent. Sandboxes are just about facilitating new developments as opposed to encouraging them. I'm sure they there's two concepts overlap, but but what we've heard in practice that it's really just a process that delivers innovation. And by making it easier. Maybe that encourages. But it doesn't inherently create new ideas. Is a comment.
AM I off beat?
AM I off beat?
10:53
10:53
10:53
10:54
Speaker 1
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Speaker 1
Yes. I mean the US is a is yeah. It's a it's a very different market. So the comparison but I. I think the the facilitating not encouraging point is, is a good one. I think, I think it absolutely facilitates. So I think that that is a is a good point in terms of that. Yeah. But in terms of encouraging. It is it is certainly a factor for. And I and I certainly think from a the see fit perspective, when we when we talk to coalition members around. What we what we can do to drive innovation.
And that's kind of address systemic barriers to innovation. The prospect of using the regulatory sandbox is, is welcomed. And that's that's large banks, not just innovation functions. I think with regards to company digital ID, the prospect of getting feedback on the interaction of policy and rules in regards to this particular practice, this particular selection of firms has been seen as a as a positive.
And that's kind of address systemic barriers to innovation. The prospect of using the regulatory sandbox is, is welcomed. And that's that's large banks, not just innovation functions. I think with regards to company digital ID, the prospect of getting feedback on the interaction of policy and rules in regards to this particular practice, this particular selection of firms has been seen as a as a positive.
10:55
10:55
Baroness Noakes
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Baroness Noakes
And that's an important element. Do you think it's an important element? And I think that's a market wide element. I think it has led to, for example, the AI survey that's just come out today from the FCA and the Bank of England. That was as a result of the innovation services. We saw that we you know, we didn't have line of sight, but we could see the deployment in small pockets, but we didn't really understand what that looked like across the marketplace. So that was a recommendation from the innovation services nine years ago. The policy making around crypto assets as a result of.
So whilst there is learning that learning then produces regulatory interventions. The financial advice and markets review, that learning then went on to market activities, which then went on to further guidance that went beneath that. So yes, learning is incredibly important, but that learning also does result in action by the regulator that the market benefits from.
So whilst there is learning that learning then produces regulatory interventions. The financial advice and markets review, that learning then went on to market activities, which then went on to further guidance that went beneath that. So yes, learning is incredibly important, but that learning also does result in action by the regulator that the market benefits from.
10:57
10:57
10:57
10:57
10:57
10:57
Lord Turnbull
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Lord Turnbull
On certain waivers of the regulatory regime and takes it forward in the sandbox. What we don't hear much about is the people who go through that process and graduate from it. I mean, is this more like sort of Peter Pan, a place where no one grows up? Where is the cases of someone who said, well, ten years ago, I went to the sandbox, I developed something, and I've taken it on from there and it's now roaring success. We're very short of that kind of information of, you know, sharing where it has really made a difference and how.
If your experiment goes well, you can then develop it still further. The other is this question that's come up about conflict of interest. A firm gets into discussion with the FCA and they come up with a bespoke package which relates to them and their.
If your experiment goes well, you can then develop it still further. The other is this question that's come up about conflict of interest. A firm gets into discussion with the FCA and they come up with a bespoke package which relates to them and their.
10:58
10:58
Lord Turnbull
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Lord Turnbull
And it may fail, in which case it just gets timed out but supposedly is doing well. What is the FCA then? Do it. Say , well, we have well, what did the company do? We have developed this and we should retain the the benefits of the effort we have put in the intellectual property we have developed. Whereas the FCA may say, no, our duty is. We should be taking that knowledge and spreading it, making it. available to other players in the market. And where do they where should the FCA actually be? Having helped someone discovered they found something that works.
Do they just sit on it and let that company continue with it? Or do they have a duty to try and find someone else who could use it?
Do they just sit on it and let that company continue with it? Or do they have a duty to try and find someone else who could use it?
10:59
10:59
10:59
Baroness Noakes
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Baroness Noakes
Cases of firms. There must be someone there as. I mean, I did a quick check outside, and certainly one of the early people in the FCA sandbox is valued at more than 100 million and has adverts on the TV. So. But I'm not you know, I would be very cautious about doing my own personal due diligence without having the insight that the regulator does into those companies to laud them as, as as the as the specific use cases. But certainly that work can be done. And there are companies, I think the one thing I was always conscious of, and one thing we always spoke of, what was success.
So it was the kind of the valuation and the impact that that potential one company could have. It was also whether it encouraged greater innovation within that, that area. So we also one of the things observed was that large financial institutions began to innovate in spaces that were like the ones that were coming from the sandbox. Our assumption was these were policy ideas, product ideas that they had in a, you know, a shelf somewhere and decided not to do so. We also looked at the. The offerings of large financial institutions. And we also looked at the partnership between those fintechs and, and banks as well.
But there are there are there are absolutely examples of companies that went through the .
So it was the kind of the valuation and the impact that that potential one company could have. It was also whether it encouraged greater innovation within that, that area. So we also one of the things observed was that large financial institutions began to innovate in spaces that were like the ones that were coming from the sandbox. Our assumption was these were policy ideas, product ideas that they had in a, you know, a shelf somewhere and decided not to do so. We also looked at the. The offerings of large financial institutions. And we also looked at the partnership between those fintechs and, and banks as well.
But there are there are there are absolutely examples of companies that went through the .
11:01
Baroness Noakes
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Baroness Noakes
More should be done to make that knowledge available. That's why I do think both. I think the change in the context, but also the benefit of us to really understand the impact of this and ensure when we're thinking about AI, is this the route we want to go down, or are there other ways that we want to go down it, that we do look at the ten years on and have a proper longitudinal study to understand the impact and inform our next ten years of financial innovation offering. But yeah, there are absolutely small companies that were being cited £60,000 a month to be regulated under a principle in a, in a market.
And they decided, nope, we want to become directly authorised through the FCA. We're going to use the regulatory sandbox. And they are now valued at over £100 million. But yeah, I agree. I think more needs to be done to, to establish that and understand whether those companies have gone to market directly. Because remember, one of the contexts of this was the challenges that we had with the Neobanks getting into the market. One of the challenges we were also facing was the peer to peer market and getting that kind of novel innovation into the market. These were these were years and years and years where we stalled as a country to get this new type of entity into the market.
What the sandbox has tried to do is get more in, you know, potentially at more of a kind of product innovation rather than a, you know, I'm a bank. It's more I'm providing a certain service of a bank or I'm providing a certain service of an insurance company. And so it will be interesting to see is whether those companies have now broadened out their offerings and are becoming banks themselves, or are becoming the insurance, the underwriting insurance company themselves. So that route to market will be important. The joint venture point will be important. One of the concerns we had in the early days was that the innovation would go out.
It would all sound great at the end of the sandbox, and they'd be bought over by a large institution, and the innovation would be taken out of the market. So that was something I we were also very concerned about. So I think looking at those lessons and that progression is, is really important, the conflicts of interest, I guess that speaks to the points I've been making around. Once. Once someone has something that we think is of value to the rest of the market, you know, the FCA would, would, would, would attempt to put that into the market in the most appropriate way, whether that be through the publication of the tests and the outcomes and the FCA's view of it, whether that be through we we published forgive me, I'm forgetting what they were called.
They weren't policy documents. They were almost white papers or something like that, where we would put out insights into themes as we saw them. We also put out guidance and we also put out rules as well. So we, we, we attempted a number of different ways to put out the lessons in a way that was appropriate for a regulator that could support the rest of the market, say, okay, this innovation is something that could work in a regulated market, or I am now benefiting from the guidance that one firm spent a lot of time and effort working with us on as well, because they remember when they're coming to the FCA to do the sandbox.
It's also costing them time and money. But if they get guidance and, you know, policy advice or regulatory advice, that's helpful. There was also a test of when to put that out into the market is that, you know, is that calibration always right? You know that that is an individual decision taken within the context within the time. And the the other information, maybe looking back ten years, with hindsight, we're able to say, well, actually we should have got that guidance out sooner.
That was clearly an .
And they decided, nope, we want to become directly authorised through the FCA. We're going to use the regulatory sandbox. And they are now valued at over £100 million. But yeah, I agree. I think more needs to be done to, to establish that and understand whether those companies have gone to market directly. Because remember, one of the contexts of this was the challenges that we had with the Neobanks getting into the market. One of the challenges we were also facing was the peer to peer market and getting that kind of novel innovation into the market. These were these were years and years and years where we stalled as a country to get this new type of entity into the market.
What the sandbox has tried to do is get more in, you know, potentially at more of a kind of product innovation rather than a, you know, I'm a bank. It's more I'm providing a certain service of a bank or I'm providing a certain service of an insurance company. And so it will be interesting to see is whether those companies have now broadened out their offerings and are becoming banks themselves, or are becoming the insurance, the underwriting insurance company themselves. So that route to market will be important. The joint venture point will be important. One of the concerns we had in the early days was that the innovation would go out.
It would all sound great at the end of the sandbox, and they'd be bought over by a large institution, and the innovation would be taken out of the market. So that was something I we were also very concerned about. So I think looking at those lessons and that progression is, is really important, the conflicts of interest, I guess that speaks to the points I've been making around. Once. Once someone has something that we think is of value to the rest of the market, you know, the FCA would, would, would, would attempt to put that into the market in the most appropriate way, whether that be through the publication of the tests and the outcomes and the FCA's view of it, whether that be through we we published forgive me, I'm forgetting what they were called.
They weren't policy documents. They were almost white papers or something like that, where we would put out insights into themes as we saw them. We also put out guidance and we also put out rules as well. So we, we, we attempted a number of different ways to put out the lessons in a way that was appropriate for a regulator that could support the rest of the market, say, okay, this innovation is something that could work in a regulated market, or I am now benefiting from the guidance that one firm spent a lot of time and effort working with us on as well, because they remember when they're coming to the FCA to do the sandbox.
It's also costing them time and money. But if they get guidance and, you know, policy advice or regulatory advice, that's helpful. There was also a test of when to put that out into the market is that, you know, is that calibration always right? You know that that is an individual decision taken within the context within the time. And the the other information, maybe looking back ten years, with hindsight, we're able to say, well, actually we should have got that guidance out sooner.
That was clearly an .
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Baroness Noakes
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Baroness Noakes
So. This is interesting because this is what I spend my time at CFA and the Gates Foundation thinking about in terms of intellectual property, because one of the challenges around bringing many players to the table is understanding what's background technology and what's funded development, what's an intellectually, what can we say belongs to the group? And how can we ensure we maximise public value from that testing and that collaboration and that that equation is slightly different as a as a regulator. And I don't have the up to date thinking on this. So the FCA may have evolved their thinking beyond that.
But ultimately the as as I see it and I. I may, I may evolve my thinking after this, but, but as I see it, the, the, the IP of the the regulatory advice was, was ours and that was ours to share with anyone as we so wished. The. And before you were in the sandbox, you. You had to sign up to a certain amount of information being shared about the test. So that was our way of ensuring that without giving away the proprietary information necessary for them to take it to market, that the benefit that they got from what they were doing in the sandbox was transmitted.
We had the rights to transmit that to the rest of the marketplace again. In, in the devil's in the detail on that one. Finally, from the perspective of the work you do at CFA with the people in the market, is there an area which you would like to see improved or changed in the way the sandboxes are run for the the kind of benefits that you're trying to achieve? Yeah, I mean, I think we'd already we'd, we'd, and it doesn't sound like this committee is of the view that the FCA should be doing all driving innovation when natural skeptical audience.
But but you know, this is not a uniform view. There is a significant amount of pressure on the FCA to be. And probably Bank of England as well, to a lesser extent to be, you know, entirely responsible for the level of innovation in the in UK financial services. So there is there's a broad view of it. I mean, I take the view that that's that there is a place where a sandbox should begin and end. And hopefully my evidence today has tried to show where I. I personally saw those lines. We, we, we believed that there were there was a lot of skeptics in the market who would not want to take innovation to an FCA.
We also believed that not everything needed regulatory feedback. They didn't need to de-risk the regulators perspective. If not everyone needs, you know, a new license or authorisation to get into market. So it could just be a product innovation in a bank. And I think that's what we're seeing at CFA is that we are now at this point of innovation where we we've seen the innovators come into the market within the capabilities other than obviously, artificial intelligence. I think we are still a very nascent stage in terms of understanding. We need more information. And there are now some structural barriers that may be impeding this innovation, kind of benefiting the market, the users, and getting into the hands of consumers and helping them to benefit from it as well.
And as such, you know, I think what CFA tries to do is bring those players to the market with government and regulators and identify ways that and give a space for industry to do that collaboration before getting into a sandbox or policy changes. Because I think if you there is a time when a sandbox is too early, there's certainly a time where regulation is too early. And if we move too quickly to to regulate, we may well inadvertently stifle that innovation. So for something like company digital ID, where it's not really about what one player does, it's really whether a group of players can trust and rely on information that is provided in a certain form at a certain time for a certain purpose, and requires the market to take a view on it.
Now, CFA is not representative of absolutely everyone you know. We are looking to drive and scale that innovation and as such, that's why we have a very close relationship with entities like UK finance, like innovate finance, like government departments and regulators, so that when we begin to see something emerging from the market, they can begin to think about it from a whole of market perspective as well. So I think, you know, I'm hearing skepticism in the room on whether the sandboxes are being used in an inappropriate way where maybe more formal, traditional regulatory tools should be used and a thirst for, I guess, evidence to back that line up.
I would encourage the committee to also look at that piece before the regulator touches it, and think about whether we're actually generating the right conditions. And it was the Treasury that set up CFA to try to support that market coordination problem before regulation and policy took hold. So looking at it as a as a whole ecosystem, I think could be helpful to think about where the line begins and ends. Good. Well, thank you very much for your evidence this morning. It's been very interesting. You've been very generous with your time and very fulsome in your replies.
So .
But ultimately the as as I see it and I. I may, I may evolve my thinking after this, but, but as I see it, the, the, the IP of the the regulatory advice was, was ours and that was ours to share with anyone as we so wished. The. And before you were in the sandbox, you. You had to sign up to a certain amount of information being shared about the test. So that was our way of ensuring that without giving away the proprietary information necessary for them to take it to market, that the benefit that they got from what they were doing in the sandbox was transmitted.
We had the rights to transmit that to the rest of the marketplace again. In, in the devil's in the detail on that one. Finally, from the perspective of the work you do at CFA with the people in the market, is there an area which you would like to see improved or changed in the way the sandboxes are run for the the kind of benefits that you're trying to achieve? Yeah, I mean, I think we'd already we'd, we'd, and it doesn't sound like this committee is of the view that the FCA should be doing all driving innovation when natural skeptical audience.
But but you know, this is not a uniform view. There is a significant amount of pressure on the FCA to be. And probably Bank of England as well, to a lesser extent to be, you know, entirely responsible for the level of innovation in the in UK financial services. So there is there's a broad view of it. I mean, I take the view that that's that there is a place where a sandbox should begin and end. And hopefully my evidence today has tried to show where I. I personally saw those lines. We, we, we believed that there were there was a lot of skeptics in the market who would not want to take innovation to an FCA.
We also believed that not everything needed regulatory feedback. They didn't need to de-risk the regulators perspective. If not everyone needs, you know, a new license or authorisation to get into market. So it could just be a product innovation in a bank. And I think that's what we're seeing at CFA is that we are now at this point of innovation where we we've seen the innovators come into the market within the capabilities other than obviously, artificial intelligence. I think we are still a very nascent stage in terms of understanding. We need more information. And there are now some structural barriers that may be impeding this innovation, kind of benefiting the market, the users, and getting into the hands of consumers and helping them to benefit from it as well.
And as such, you know, I think what CFA tries to do is bring those players to the market with government and regulators and identify ways that and give a space for industry to do that collaboration before getting into a sandbox or policy changes. Because I think if you there is a time when a sandbox is too early, there's certainly a time where regulation is too early. And if we move too quickly to to regulate, we may well inadvertently stifle that innovation. So for something like company digital ID, where it's not really about what one player does, it's really whether a group of players can trust and rely on information that is provided in a certain form at a certain time for a certain purpose, and requires the market to take a view on it.
Now, CFA is not representative of absolutely everyone you know. We are looking to drive and scale that innovation and as such, that's why we have a very close relationship with entities like UK finance, like innovate finance, like government departments and regulators, so that when we begin to see something emerging from the market, they can begin to think about it from a whole of market perspective as well. So I think, you know, I'm hearing skepticism in the room on whether the sandboxes are being used in an inappropriate way where maybe more formal, traditional regulatory tools should be used and a thirst for, I guess, evidence to back that line up.
I would encourage the committee to also look at that piece before the regulator touches it, and think about whether we're actually generating the right conditions. And it was the Treasury that set up CFA to try to support that market coordination problem before regulation and policy took hold. So looking at it as a as a whole ecosystem, I think could be helpful to think about where the line begins and ends. Good. Well, thank you very much for your evidence this morning. It's been very interesting. You've been very generous with your time and very fulsome in your replies.
So .
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