Sandbox in Financial Services: An ideal testing platform

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On April 14, 2016, the FCA (Financial Conduct Authority), one of the prime regulators in the United Kingdom, announced that it was preparing to launch a ‘Regulatory Sandbox’[1]. It has started accepting applications from May 9, 2016 and successful applicants will be able to directly deploy their products in this sandbox for testing purposes. Quick to follow in their heels are regulators from Singapore and Australia, who are contemplating setting up a sandbox environment of their own.

So what is a sandbox and why is it taking the FinTech and regulatory world by storm? Let’s find out:

What is a Sandbox?

sandbox-828552_640A sandbox is an isolated environment that allows a program to be executed without affecting the application it is running on[2]. It is used by developers to test new code. It acts as a virtual machine in a controlled environment, hence making sure that the program does not harm or alter any data in the server or the host system. This allows developers to test their programs before implementation in the main system in a secure and safe environment.

How will it benefit FinTech startups?

Microsoft and Markit have written to the Treasury Department’s Office of Comptroller (OCC) regarding a need for the US regulators to bring in an environment similar to the one implemented by the FCA. Markit asked the OCC whether companies “have appropriate space to breathe, to develop and test innovative solutions without fear of enforcement action and regulatory fines,” in a letter submitted May 31. Microsoft put forth a demand for a sandbox, stressing on a need for a US version of FCA’s FinTech approach. Law firm Morrison Foerster and Citigroup echoed this demand.[3]

Some of the benefits of a sandbox for the FinTech and financial services industry are as follows:

  • Financially viable: In order to encourage innovation, various sandbox providers like FinTech Sandbox provide free data or subscriptions, which would otherwise add to the financial strain on startups operating within a limited capital. The environment is also freely made available to subscribers, saving the additional costs startups might have incurred to deploy virtual machines before actually implementing their products.
  • Secure testing platform: As quoted by Christopher Woolard, FCA’s Director of Strategy and Competition, “The sandbox environment will allow startups to test their ideas without immediately incurring the normal regulatory consequences”. [4] This will allow startups to test their products and services for proof of concept, and the FCA is providing individual guidance, rule waivers and modifications and in some cases “no enforcement action letters”. [5]
  • Access to APIs: Various sandbox providers also give access to banking data which helps organizations test, analyze and visualizes data to help get a real world use case. FinTech sandbox in particular is giving access to SEC-filed data which includes filings and disclosures. Access to such APIs is normally restricted by banks and financial institutions and also the regulatory bodies. [6] The FCA too states that it will offer public data sets provided by private firms to organizations registered to use the platform.[7]

About Hexanika:

HEXANIKA is a FinTech big data software company which has developed an end-to-end solution for financial institutions to address data sourcing and reporting challenges for regulatory compliance. Hexanika’s solution improves data quality, keeps regulatory reporting in harmony with the dynamic regulatory requirements and keeps pace with the new developments and latest regulatory updates.

 

Contributor: Vedvrat Shikarpur

Image Credits cdu445

[1] Crowdfund Insider: FCA Prepares UK #FinTech “Regulatory Sandbox” for Early May

[2] Techtarget: Definition of Sandbox

[3] CNBC: Banks and start-ups debate regulation

[4] FCA: Innovate Finance Global Summit

[5] FCA: Regulatory Sandbox

[6] Finance Magnates: FinTech Sandbox Adds EDGAR Online for Firms to Access SEC Filings

[7] The Asian Banker: Innovation the “regulatory sandbox” way

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