Innovating for innovation: The rise of the regulatory sandbox

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In many fields regulation is there to keep us safe and encourage ethical practice but where high barriers to entry exist this frequently leads to limited market choices and poorer access to services. In order to deal with this issue regulators are increasingly experimenting with new approaches, including the development of regulatory sandboxes.

What is the regulatory sandbox? 

Regulatory sandboxes provide safe spaces for experimenting. In brief they constitute a programme adopted by regulators which provide a new set of rules for those people looking to test their new products and business models in a live environment. They combine release from specific regulatory frameworks with strict regulatory supervision over a time limited period. They can help to minimize legal uncertainties for innovators, and help to improve access to investment.

regulatory-sandboxIn this way regulatory sandboxes can be seen to provide a fix to the challenges presented by regulation-heavy environments by removing barriers to entry. 

In February ofgem announced that they will be launching a ‘Regulatory  Sandbox’. The UK energy sector regulator has invited proposals for innovations which could benefit from being given the opportunity to test new innovations without the traditional regulatory constraints that face new start-ups.

It is an example of a trend in regulation that is seeking to overcome the challenge of providing a safe and accessible space for innovations that frequently find regulation a barrier, whilst still maintaining the protections that we need.

Social innovation is about providing new solutions to some of the intractable challenges that we face. However social innovation can also be about overcoming the blockages in the system that prevent good ideas from taking hold, changing the relationships between actors or the ways that people work together.

By utilising socially innovative tools and methods themselves policymakers and regulators have a role to play in creating new ways of working, new business models, new organisational structures, and new governance forms. In this way they can help to overcome those barriers that stop ideas- both old and new- from taking hold.

What makes the sandbox model particularly interesting is that it can be seen to be an example of what is known as ‘right touch’ regulation. This is a more bespoke approach to dealing with innovation, and a more nimble approach to the needs of innovators, the role of regulation and the needs of consumers.

This pioneering policy instrument was developed for the world of finance and is increasingly popular as a way of dealing with regulatory barriers to innovation in this field. It has played a key role in facilitating innovations in financial technology (FinTech).  Sandboxes now exist in the UK, Singapore, Hong Kong and Australia with policymakers in the USA also debating the merits of the approach.

The sandbox developed in 2016 by the UK’s Financial Conduct Authority (FCA) was the first example of this model of regulation. Of the firms who applied to be part of the first cohort, 24 met the eligibility criteria, whilst 18 firms are now entering the test phase, with a second cohort currently being selected.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA described the process of initiating the sandbox:

It has been an intense process for both firms and ourselves and we are grateful for their cooperation and hard work in getting us all to this position. We look forward to these businesses bringing new products and services to market whilst we ensure that appropriate consumer protection safeguards are in place.[i]

The approach will take time to deliver its impacts but the arrival of the ofgem sandbox demonstrates the appetite to move this approach beyond finance, signalling opportunities in new sectors and once again suggesting the UK is ahead of the game when it comes to innovation. Like the sandbox developed by the FCA, this is part of a wider suite of support for innovation which not only enables, but seeks to remove barriers, with the aim of providing new and better quality services to the people who need them.

It is an approach which considers policymakers as not only helping innovation but also being innovators. As discussed in our joint report with NESTA for the ‘Social Innovation Communities’ project, ‘Social Innovation Policy in Europe: Where Next?’, if we are to make headway in dealing with societies ‘wicked problems’, policymakers need to conceive of themselves as innovators, rather than just being there to support innovators.

The sandbox approach is one encouraging signal that this message is beginning to take hold.

Regulatory innovation can be difficult, it is about getting the balance right between ensuring consumer protections whilst making sure that it’s possible to try new things. The trial approach being adopted will offer useful insight, not only into how to regulate innovation but also into how we can experiment with new approaches, even in potentially high-risk environments.

[i] FCA Press Release: ‘Financial Conduct Authority unveils successful sandbox firms on the second anniversary of Project Innovate’ https://www.fca.org.uk/news/press-releases/financial-conduct-authority-unveils-successful-sandbox-firms-second-anniversary

 

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