Regulatory Sandboxes: What Are They?
The financial crisis in 2008 led to the collapse of financial institutions worldwide. Consequently, the financial sector came under extreme regulatory pressure, leading to increased compliance requirements imposed by regulators. At the same time, there were emerging technologies coming to the market. These technologies were potentially beneficial but could pose unknown regulatory risks. Stakeholders and regulators had to internalize the risks. To nurture innovative services and products and at the same time ensure financial integrity and compliance, financial regulators employed different techniques to encourage new technologies to develop.
A regulatory sandbox is a modern tool used by regulators to ensure the development of innovations in a controlled manner. It allows a regulator to integrate and properly regulate innovation before making permanent regulatory reforms or changes. Regulatory sandboxes act as incubators for authorized (and supervised) innovation. Stakeholders, firms, and regulators can come up with a better way to balance between the implementation of innovation vis-à-vis regulatory compliance. They can also be used as tools to gather data for making regulatory adjustments to meet emerging technological innovations.
Innovation is cultivated using regulatory sandboxes. Hence, these sandboxes can be used alongside other methods like innovation hubs. Innovation hubs are points of contact that are open to participants who intend to market. These hubs offer ways of discussing issues that pertain to regulation and how regulation interacts with technological innovation.
Sandboxes are more specialized as compared to innovative hubs. Sandboxes are special because they allow firms to test their innovative products and services with real consumers. They are used by businesses that intend to bring innovative services or products to the market. The terms of reference and conditions for the use of regulatory sandboxes are defined by a regulator.
After there is approval for testing, the testing conditions are agreed upon between the regulator and the business. There is always a time set for testing, and such may be extended if need be. After the testing, the regulator can approve the technology, reject it, or recommend further improvements.
Sandboxes are designed to support innovation, encourage market development, and enhance growth and completion in the financial sector. It is also seen as a method in which government and business can cooperate in ensuring that technologies are beneficial to the market and comply with regulations. There is a key advantage of regulatory certainty, which is achieved using sandboxes. Also, the stakeholders can learn the challenges of bringing to market any new product or innovation.
The UK FCA was one of the top pioneers of regulatory sandboxes. According to the UK FCA statement, because of the use of sandboxes, the time to market any innovation and products will be shortened by more than 30 percent. FinTech access to finance was expected to increase by 15 percent using regulatory sandboxes by the FCA. In comparison to innovation hubs, sandboxes are an expensive option for many regulators. They require implementation, which is expensive because of the associated legislative changes. Even though innovation hubs are less expensive, sandboxes offer a more interactive approach, as the innovative solution can be tested within the market itself. The uptake of sandboxes increased after their introduction in the UK in 2015, with many other countries following the model.
Because of the above advantages of regulatory sandboxes, they have been adopted by many countries. In Kenya, both the CMA and the Communication Authority ran regulatory sandbox frameworks.
The CA’s Framework for Emerging Technologies Regulatory Sandbox 2023 is a policy that outlines the services and products that can be tested under the supervision of the CA. These include services like innovative telecommunication solutions, IoT devices, cybersecurity tools, e-health solutions, drone technologies, e-learning platforms, new broadcasting tech, AI-driven services, digital identity solutions, smart city solutions, etc.
The CMA’s Regulatory Sandbox Policy Guide Note governs sandboxes within the capital markets. It provides for eligibility, safeguards, application, and testing requirements for businesses that seek to live test their solutions, services, and innovative products within the Authority’s sandbox.
The policy by CMA is aimed at dealing with risks posed by the financial sector. The sandbox requires compliance with safeguards, customer protection, complaint procedures, and regulatory risk management.
To read the CMA’s Regulatory Sandbox Policy Guide Note, click this link:
To read the CA’s Framework for Emerging Technologies Regulatory Sandbox 2023, click this link: https://repository.ca.go.ke/server/api/core/bitstreams/b4bc3151-ce12-49df-940d-5fb5ec0c0bce/content
Disclaimer: This publication is for general information only and does not constitute legal advice. Specific advice should be sought for individual circumstances.
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