What impact is the FCA Digital Sandbox bringing for RegTech startups?


While the RegTech sector is fairly young compared to some of its counterparts, the industry is brimming with energy and innovation and is experiencing a considerable boon in growth. 

With such investment and attention on the sector, the FCA previously confirmed that they will run a permanent digital sandbox to help companies access synthetic data and thousands of FinTech APIs to build on these rising demands.

The sandbox, according to the FCA’s head of data, is to aid the development of new products and services as businesses incorporate more AI and emerging technologies into their workflows.

According to Dr Henry Balani, global head of industry and regulatory affairs at Encompass, this approach positively supports the development of new financial services, especially with the advent of AI.

He added, “Both FinTech and RegTech benefit from an environment that supports the development and testing of potentially disruptive financial products in a safe and non-market disruptive manner.”

Balani explained that the sandbox is more than just a technical platform, and includes direct access to academics, venture capitalists and charities as well as government bodies. “This wider reach means a more robust environment to fully flesh out new financial products and their regulatory implications,” he said.

Furthermore, Balani stated that the sandbox means existing financial products can be tested for negative societal impact, including fraud, scams and greenwashing. He cited Generative AI, in particular, has raised concerns. “While there is a lot of hyperbole and confusion around doomsday scenarios, the sandbox provides a platform for measured, thorough testing where reasonable conclusions can be drawn,” he stated.

The companies most likely to benefit from this sandbox will be new and nimble startups entering the RegTech space. “Startups are typically resource and time crunched and the sandbox provides an environment to accelerate their development cycles, including ‘failing quickly’ to conserve precious resources,” said Balani.

He continued that the sandbox as set up provides significant transaction data with over a thousand APIs that provide access to other financial data such as payments, investment, transactions and consumer data that allows for fast and robust testing.

“RegTechs also benefit from a platform that has been previously used to test other hypotheses, which means that lessons previously learned can be built upon, further improving time to market for new innovations that have a better probability of succeeding. Collaboration between RegTech startups would also improve as they all use a digital sandbox with a common infrastructure,” said Balani.

Balani concluded that this new approach means that the industry will see new generations of RegTech firms withproducts that have moved past a ‘proof of concept’ stage when coming to market and which have already addressed complex regulatory challenges.

“Given geo-political, economic and financial market challenges we see today, we can expect RegTech solutions to benefit consumers – ultimately the intended user and beneficiary of financial products,” he exclaimed.

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