FCA Publishes Call for Input on Cross-Sector Sandbox

By Regulatory News

May 29, 2019

FCA is inviting comments on the concept of a cross-sector sandbox. This Call for Input has been published to expand and deepen the discussions on whether a cross-sectoral sandbox or a similar mechanism is needed to ensure a consistent and efficient approach to emerging technologies. The Call for Input offers an overview of what a sandbox is and, using case studies, explains the opportunities and challenges a cross-sectoral sandbox could pose for firms and regulators. Comments are requested until August 30, 2019.

The information to be provided by a third party seeking authorization to assess the compliance of securitizations with the STS criteria provided for in Securitization Regulation should enable a competent authority to evaluate whether and, to what extent, the applicant meets the conditions of Article 28(1) of the Securitization Regulation. An authorized third party will be able to provide STS assessment services across EU. The application for authorization should, therefore, comprehensively identify that third party, any group to which this third party belongs, and the scope of its activities. With regard to the STS assessment services to be provided, the application should include the envisaged scope of the services to be provided as well as their geographical scope, particularly the following:

To facilitate effective use of the authorization resources of a competent authority, each application for authorization should include a table clearly identifying each submitted document and its relevance to the conditions that must be met for authorization.
To enable the competent authority to assess whether the fees charged by the third party are non-discriminatory and are sufficient and appropriate to cover the costs for the provision of the STS assessment services, as required by Article 28(1)(a) of Securitization Regulation, the third party should provide comprehensive information on pricing policies, pricing criteria, fee structures, and fee schedules.
To enable the competent authority to assess whether the third party is able to ensure the integrity and independence of the STS assessment process, that third party should provide information on the structure of those internal controls. Furthermore, the third party should provide comprehensive information on the composition of the management body and on the qualifications and repute of each of its members.
To enable the competent authority to assess whether the third party has sufficient operational safeguards and internal processes to assess STS compliance, the third party should provide information on its procedures relating to the required qualification of its staff. The third party should also demonstrate that its STS assessment methodology is sensitive to the type of securitization and that specifies separate procedures and safeguards for asset-backed commercial paper (ABCP) transactions/programs and non-ABCP securitizations.

The use of outsourcing arrangements and a reliance on the use of external experts can raise concerns about the robustness of operational safeguards and internal processes. The application should, therefore, contain specific information about the nature and scope of any such outsourcing arrangements or use of external experts as well as the third party's governance over those arrangements. Regulation (EU) 2019/885 is based on the draft regulatory technical standards submitted by ESMA to EC.

Related Links

Effective Date: June 18, 2019

Press Release

Proposed Rule 1

Proposed Rule 2

Proposed Rule 3

Presentation on Regulatory Framework (PDF)

Presentation on Resolution Plan Rules (PDF)

FCA has explained that emerging technologies, such as artificial intelligence and distributed ledger technology, are changing business models across all markets. Regulators are needed to ensure that they are adapting to these changing market conditions and can respond to support firms, protect consumers, and ensure that markets work well. FCA suggests that cross-cutting nature of these technologies and challenges suggests that a practical way of working between regulators should be established. There are multiple mechanisms or frameworks that could support a collaborative approach. Based on experience with the FCA sandbox, FCA suggests a cross-sector sandbox could be one such approach. It would provide a single-point-of-entry sandbox for firms to test innovative propositions with multiple UK regulators, in a controlled environment. Experience suggests that this could be a way to help innovation flourish while also ensuring traditional policy aims of ensuring consumer protection and promoting competition are maintained.

Opportunities and benefits of a cross-sector sandbox include helping to facilitate small-scale, controlled tests of innovative propositions and helping firms, especially those with complex business models or business models that span more than one sector, to navigate the requirements of different regulators. It could also provide shared lessons for regulators, as they would have the opportunity to understand how different sectors are responding to different technologies and emerging trends. This could help inform a coherent UK approach to cross-cutting innovations.

The Call for Input also discusses challenges with a cross-sector sandbox. This includes a lack of proven demand, a misunderstanding about the purpose of the sandbox, and firms not improving their own in-house knowledge. These are also the challenges FCA faced with its current sandbox and FCA believes that there are ways to mitigate them by creating eligibility criteria that require firms to show a need for testing to ensure that only those innovative ideas that would benefit from a sandbox test would be accepted. Another way to mitigate these challenges is by ensuring that firms do due diligence before any test by demonstrating that they understand the regulatory framework in which they operate. Additionally, there could also be a challenge around different aspects of the tests as regulators have different remits and, therefore, regulators may arrive at different conclusions when looking at the same test. However, having more discussions on a proposition can also help ensure that a test is more robust. Overall, FCA suggests that a cross-sector sandbox could be a good starting point for the type of practical collaboration that is needed.

Related Link: Call for Input (PDF)

Comment Due Date: August 30, 2019

Keywords: Europe, UK, Banking, Securities, Artificial Intelligence, Distributed Ledger Technology, Cross-Sector Sandbox, Fintech, Regtech, FCA

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