How the FCA uses sandboxes to dig out AI fintech solutions

Times

a day ago

Zilch, a high-flying consumer credit firm that was founded in 2018 and is valued at more than £1.5 billion, first tested out its services in the 'childlike' safety of what is known as a sandbox.
The parent of this play area is the City regulator, the Financial Conduct Authority (FCA), and it allowed Zilch, and the dozens of other fintech firms that took part, to play around, or experiment, without causing consumers any harm or falling foul of any regulations.
Zilch's rapid rise since illustrates the valuable role that regulators can play to encourage innovative start-ups to disrupt existing markets with new approaches. Sandboxes are also a vital tool in the armoury of policy makers in their attempts to protect Britain's competitive edge in fast-moving sectors, ranging from life sciences to space exploration.
After using the sandbox for 12 months, Zilch launched in 2020 with a licence from the FCA and has since been used by over 4.5 million customers. Desmond McNamara, its chief risk officer, said: 'The sandbox programme allowed us to go through that process of regulation whilst we were building the business. If we had to build the whole business, then apply, it would have been harder.'
The FCA has doubled down on its approach with financial services, launching last month what it has called a 'supercharged sandbox' to help facilitate the rapid introduction of AI-powered financial services.
In essence, a sandbox gives technology companies a controlled environment to test systems safely. In the case of the AI sandbox, announced last month, the FCA is letting businesses test AI applications such as fraud detection, real-time credit scoring and enhanced customer service. Companies use dummy data created by the FCA, such as fake card numbers and bank account details, and also have access to computing power that they might not otherwise be able to afford. The FCA has struck a deal with the chipmaker Nvidia to provide access to its data centres and also some of its software. The application period is now open and the first companies are expected to start experimenting in October.
Alex Kirkhope, partner at Shoosmiths, a law firm which advises companies on how to use sandboxes, said: 'It's a space that allows businesses, especially smaller businesses, the ones who don't have the infrastructure or the access to computing power, to be able to do that themselves, whether they're developing those systems themselves or whether they are looking to deploy them and understand how they operate.'
Kirkhope said it was significant that Nvidia has chosen to partner with the regulator on this project. 'Their chips are some of the most advanced processing that exists in the world today. Their involvement, investment and interest in the UK economy and UK fintech space has to be seen as a positive because if they weren't talking to us, they would be talking to China, US, and probably other major European nations,' he said.
McNamara from Zilch said the sandbox was particularly attractive to start-ups, which are typically still learning what they can do and what the regulator will allow them to do. 'The regular authorisation process is more naturally tailored to firms who are already authorised and they were adding to their authorisation,' he said. 'Whereas the regulatory sandbox allows firms who are starting out, because there is a more natural startup culture, you don't have to come with the answer to everything at the start, it's much more of an interactive process.'
Francesco Fulcoli, the chief compliance and risk officer at Flagstone, a savings platform, is one of those considering using the new testing environment. Flagstone already manages £16.2 billion in people's savings and it is hoping to use the FCA sandbox to test its use of AI for customer support, anti-money laundering and a fully automated process for new customers starting an account. 'Working with many other regulators across the globe, this was a good move. Not many regulators are going that direction,' he said. 'I think it's a good step ahead and will help the fintech environment to keep growing in the UK.'
Nicky Goulimis, co-founder of Tunic Pay, a fintech company that helps banks stop fraudulent bank transfers, is another hoping to use the sandbox to help build out its AI. Goulimis said she was particularly encouraged by the FCA's inclusion of agentic AI, which uses reasoning to autonomously make decisions and perform tasks.
'It's going to massively encourage innovation because it's unlocking new use cases that would otherwise not be possible. My interpretation is that this is the FCA saying, we are open for business around agentic systems, which has historically not been the perspective,' said Goulimis.
Tunic Pay has already started using AI and is hoping access to the sandbox will help the company collaborate with the government and 'push the imagination' of what can be done with AI agents for scam detection and prevention.
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Financial services is not the only area of the economy where regulators are using sandboxes to let startups experiment. The Department for Science, Innovation and Technology has funded sandboxes to help industry and academics work on wireless technology, engineering biology and novel space activities.
Kirkhope said the latest AI sandbox is just one piece of the puzzle for harnessing AI. 'The government needs to invest in and encourage the build-out of AI infrastructure, particularly compute and data processing, data centre capacity within the UK. And I don't think we should underestimate that challenge. Unless it all works together, we can only get so far,' he said.