The Financial Conduct Authority’s (FCA) regulatory sandbox process has brought benefits but has highlighted various challenges for FinTech firms in testing their models, according to a study by Deloitte.

The consultancy firm collaborated with Innovate Finance to survey a number of companies participating in the FCA’s sandbox, which allows business to try out innovative products, services and delivery methods on real consumers in a regulatory ‘safe space’ before going to market.

It found they were broadly supportive of the regulator’s model of running the sandbox.

However, the survey did highlight a number of key areas where the four-stage process could be improved and simplified to help firms make sense of the maze of regulations and legal restrictions that apply to them.

A majority of those asked said the paperwork required to obtain the FCA’s authorisations and meet regulatory goals was "daunting", especially the need to navigate and interpret the FCA's handbook, the study said.

At this early stage of business development, firms with background in financial services had a clear headstart, while FinTechs with less exposure to the regulatory environment struggled more, suggesting a need for early investment in compliance and legal teams.

Meanwhile, the testing stage proved challenging for a number of firms, including factors such as a finding willing customers to test on, time constraints and testing alongside ‘business as usual’, which was cited as a particularly tricky part of the process.

Another challenge at this stage was the need for users to open business bank accounts, which many found time-consuming and a delaying factor.

At the end of the process, users transition out of the sandbox. The survey revealed that this final stage presented the most difficulty for firms in terms of clarity.

Some noted they had no clear ‘graduation day’ marking the end of the sandboxing process or any ongoing exchanges with the sandbox team, indicating a need for better support for firms as they progress from sandboxing into real-world business implementation.

Firms also called for better use of ‘cohort networks’ as businesses progress to the open market.

To date 89 firms have been accepted into the FCA’s sandbox programme, with 29 participating in the most recent cohort. The programme was launched in 2016.

Suchitra Nair, director at Deloitte said overall the FCA’s sandbox journey had been a positive experience for many firms.

“The biggest benefit of the sandbox by far has been to give unique business models a chance to test and compete in the regulated space,” he added.

Nair concluded: “At a time of ever-increasing internationalisation in financial services, the development of a sandbox that allows international regulators to work closely together and enable firms to test cross border would be hugely beneficial to the FinTech industry.”

Charlotte Crosswell, chief exective of Innovate Finance, said the FCA sandbox was evidence that regulators can play an active and positive role in encouraging innovation by giving innovative businesses ‘permission to play’ in the financial services sector.

The FCA has said it is considering the next steps for the sandbox model, including developing a global financial innovation network and a global regulatory sandbox.

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