Regulatory Sandboxes provide an environment for innovation to flourish. Katherine Jane, Deputy Director General at the Guernsey Financial Services Commission, discusses their merits.
Guernsey has a long history of innovation. From the world’s first Protected Cell Company in 1997 to the family office friendly Private Investment Fund launched in 2021; ongoing innovation in financial services has contributed to the jurisdiction’s success as an international finance sector. But now, regulators around the world are pioneering new ways to facilitate innovation through establishing “Innovation Hubs”, “Regulatory Sandboxes”, and “Regulatory Accelerators”. For consumers, the benefits of these include greater choice in products (allowing them to select ones which better meet their needs) and greater financial inclusion, according to a recent report from the International Organisation of Securities Commissions (“IOSCO”), the global standard setter for securities market regulation. But they also create benefits which firms can leverage, such as enhanced customer retention for firms that deliver products which serve their customers’ needs well and a wider customer base for companies that deliver products to under-served communities. So, given all the benefits of a “Regulatory Sandbox”, why doesn’t Guernsey have one?
To get to the bottom of this, I spoke to Caroline Bradley and Alison Gavey, co-Directors of the Authorisations and Innovation Division at the Guernsey Financial Services Commission (“GFSC”).
“Part of the benefit of being a small regulator is that we can do those things within our normal processes. We are able to take a flexible approach and review each innovative submission on a case-by-case basis, as a one-size Regulatory Sandbox does not necessarily fit all,” they said.
“To understand what this means in practice we need to dig a little deeper into what a Regulatory Sandbox actually is. According to IOSCO, it’s a framework which ‘allow(s) small scale, live testing of innovations by private firms in a controlled environment under the regulator’s supervision’”.
As Caroline and Alison explain, the GFSC have the ability to grant licences with bespoke conditions, which enables firms to try out their ideas whilst still being licenced by the Commission. These conditions may limit the trial to a predefined scope of regulated activities, client types or a specific timeframe, or could even be linked to particular actions which must be taken.
“This allows us to deal with innovative ideas in a way that ensures consumers are adequately protected, but allows businesses to try out new ideas to better serve their customers and allow their firms to grow”.
The GFSC has long recognised that in order to foster development of innovative products within the Bailiwick, there needs to be open channels for communication and regulatory clarity. To do this, in 2016 the GFSC created the “Innovation SoundBox”.
What is the Innovation SoundBox?
In essence, it is a way to get an initial face-to-face meeting with the GFSC to gain clarity around their regulatory expectations. But, it doesn’t stop there. The GFSC continues to support firms through the licence application process and beyond. In theory, this is how it works. After a firm has requested a meeting via the online enquiry form, the regulator sets up a face-to-face meeting between the firm and relevant specialists from across the GFSC. The purpose of this initial meeting is twofold.
Firstly, it is to help the regulator understand the innovative product or service. Secondly, it provides an opportunity for the firm to gain clarity; not only with respect to their product fit within the regulatory framework, but also through getting a steer from the regulator itself on any potential regulatory challenges their proposition could face. And after this initial meeting, the GFSC continues to work with the firm to help get them to a stage where they can apply for authorisation.
“A classic example,” according to Alison, “is the process followed when the Commission authorised the first crypto fund in October 2021. The approval process required early and frequent engagement with the applicant during which the Commission’s expectations around key controls, governance and custody were all discussed in detail”.
Initial conversations regarding the GFSC’s expectations are a useful steer for potential applicants and Caroline and Alison regularly receive several calls each week to discuss innovative and esoteric proposals.
And the cost? The GFSC do not charge any fees for consulting with their Innovation SoundBox team.
Who is the Innovation SoundBox open to?
The short answer is that the Innovation SoundBox is open to anyone thinking about operating from or within Guernsey, no matter their proposition.
In most cases, firms do not need to have a conversation with the regulator before submitting an application for licensing, authorisation or registration. For a standard fund, fiduciary or insurance product, prospective licensees can typically submit an application with support from local professionals without needing to talk to the regulator. This is because the GFSC’s expectations for ordinary firms have already been made clear through their published rules and guidance.
But for edge-cases and innovative products, the GFSC encourages firms to start a dialogue with them at an early stage through the Innovation SoundBox. Caroline and Alison were keen to emphasise that the opportunity is open not only to start-ups, but companies at all stages of the business cycle, from prospective businesses with just an early-stage idea through to established financial services businesses. Nor do the ideas have to be amazingly innovative. As Caroline explained, “it does not have to be an industry-changing innovation or a ground-breaking idea, it can be a small tweak”.
Conclusion: Does Guernsey still need a Regulatory Sandbox?
Even though Guernsey has an Innovation SoundBox, could the jurisdiction still benefit from a Regulatory Sandbox? To answer this question, we compared the outcomes from Regulatory Sandboxes from across the world to Guernsey’s less formal approach.Cost. Whilst the FCA’s Regulatory Sandbox looks to provide firms with a lower cost to market, firms wanting to carry out regulated activities during their sandbox test still need to apply to be authorised/registered by the FCA and must pay the standard authorisation fee. So, even though participation in the FCA’s Regulatory Sandbox is in itself free, the overall cost component is identical to the GFSC’s approach: in both cases, firms wanting to test ideas in the regulated financial services space must apply and pay to become licenced by the regulator.
Inclusion. Regulators with Innovation Hubs, Regulatory Sandboxes, and Regulatory Accelerators have been criticised by innovators for strict eligibility criteria. For instance, the Securities and Exchange Commission of Brazil rejected 65% of the proposals received between 2018 and 2020 because these failed to demonstrate “genuine financial innovation”. This is a similar story to the FCA, which rejected 69% of all applications to its Regulatory Sandbox. In contrast, the GFSC are willing to talk to anyone with a developed idea that requests a meeting via the Innovation SoundBox, even if it just relates to an innovative tweak.
Time-to-market. One key benefit for innovators from regulators facilitating innovation is reduced time-to-market. Firms accepted into the FCA’s Regulatory Sandbox have a testing phase of approximately six months in which they are restricted to testing their product with a limited number of customers. Only after successful graduation from the Sandbox can the firm apply for full authorisation and, if granted, market their product/service more widely. Contrast this with the GFSC’s approach. The approval process for Guernsey’s first crypto fund took around 5 months in totality, from initial discussions to final authorisation.
In short – Guernsey’s approach achieves the same outcomes as a Regulatory Sandbox at the same cost for firms, but has several advantages over it. It has a shorter time-to-market, can help a wider spectrum of innovative firms, and has the added benefit of less form-filling and more time talking face-to-face with the individuals dealing directly with the prospective application. While this approach might not work for larger regulators, Guernsey is one of the few small jurisdictions actually taking this approach.
No. Guernsey does not need a Regulatory Sandbox. Its approach is already much better.