The "regulatory sandbox" initiative is aimed at supporting innovation in financial services and is scheduled to be operational by spring 2016, the regulator said.
The scheme will expand the scope of the FCA's existing Project Innovate through which the FCA runs an Innovation Hub to help companies looking to use technology to disrupt the UK's financial services sector address regulatory compliance issues.
Benefits of the sandbox initiative could include reducing the time and cost companies spend in bringing ideas to market, helping those businesses to gain greater access to finance and providing for greater choice of products for consumers in the market, the FCA said.
"We believe that it is feasible for the FCA to reduce some of the existing regulatory barriers to firms that are testing new ideas, while also maintaining suitable safeguards," the FCA said (26-page / 462KB PDF) in a document outlining its latest proposals.
The regulatory sandbox will be open to non-authorised companies and existing authorised businesses to engage with, although "consistent criteria" on eligibility for testing via the scheme will apply.
The FCA said it wants to allow businesses to engage with the regulatory sandbox through a number of different mechanisms, acknowledging the scheme would be attractive to different types of companies developing a wide variety of products and services.
One option the FCA has proposed for unauthorised companies would enable those businesses to trial new products or services in a real-life environment whilst observing a light touch regulatory regime. The regulator confirmed, though, that this "restricted authorisation" mechanism would not be available to companies carrying out payment services or e-money activities and would also not "replace the banking mobilisation authorisation process" that already exists.
"The restricted authorisation option will allow firms to become authorised in their own right while only having to meet authorisation requirements that are proportionate to testing activities," the FCA said. "When launching full commercial activity, firms will have to apply to have restrictions lifted in order to carry on relevant regulated activities but they will not have to apply for new authorisation."
The FCA said that some "unauthorised innovators" may, though, find it better to set up an umbrella company to offer new services "under its shelter as appointed representatives". The regulator said that it would help companies set up such arrangements via its Innovation Hub. Insurance underwriters and investment managers would, however, be among the companies unable to take advantage of the "sandbox umbrella" option as a result of existing regulatory restrictions, it said.
"This option would take some time to implement but it would be faster and simpler for innovators to use than the restricted authorisation option," the FCA said. "Innovators would not have to apply for authorisation and meet authorisation requirements in their own right. The umbrella company would assess whether the firms applying to become appointed representatives are ready to test their solutions."
The regulatory sandbox would also be open to authorised firms and technology companies that provide outsourced services in the financial services sector, the FCA said.
Businesses that engage in sandbox testing via this mechanism could receive assistance in a number of ways, including receiving FCA assurances that their testing activities will not be subject to enforcement action. The FCA could also issue them with guidance on how regulations apply to their testing activities, and in some circumstances the sandbox companies could also obtain waivers from the regulator to carry out with testing activities that do not comply with existing regulations, it said.
For sandbox testing involving authorised firms or technology companies the FCA has proposed putting in place "safeguards" for consumers on a "case-by-case basis". These might include requiring sandbox companies to obtain customers' "informed consent" to testing, to compensate customers for any losses they sustain during the testing phase and/or to give customers access to existing protections like the Financial Services Compensation Scheme, it said.
The FCA also signalled its support for companies wishing to establish a "virtual sandbox" through which they could "test their solutions virtually without entering the real market".
Financial services and technology law expert John Salmon of Pinsent Masons, the law firm behind Out-Law.com, said: "“The FCA is now looking to have this up and running by spring 2016 and is inviting the sector to help shape its design. Businesses within the sector are just as concerned as the FCA is about ensuring consumers engage with innovative new products and are not put off by perceived risks."
"There is a good opportunity for businesses within the sector to assess the approaches suggested by the FCA that could enable consumer protection – whether it is obtaining informed consent from customers, a case-by-case approach to compensation or the investment sector taking the risk, it seems that there are a number of plausible ways forward which will enable this initiative to achieve some success," Salmon said.
Christopher Woolard, director of strategy and competition at the FCA, said in a speech in Hong Kong on Tuesday that the FCA's "ultimate aim" is for the regulatory sandbox benefits to "lead to better outcomes for consumers, such as more competitive products and services".
"These are ideas to start the debate," Woolard said. "We are now looking to engage widely to explore the options further. And there will be more to come. We are in discussions to identify potential ways to support the adoption of technology to facilitate the delivery of regulatory requirements, known as ‘Regtech’. There is an opportunity for technology to play a part in reducing compliance costs and we are committed to help finding better solutions."