Regulatory Sandboxes - Should it be implemented?

If Felix Hufeld, chief of the German financial regulatory authority (BaFin), is questioned about regulatory sandboxes, he speaks of a marketing concept with high undesirable side effects ( In contrast to his opinion, the UK Financial Conduct Authority (FCA), the first regulatory authority to adopt the sandbox approach, advertises its program with arguments like a “reduced time-to-market” for FinTech startups and their products. (

But what are regulatory sandboxes all about?

Is there a right or wrong in the discussion whether it should be implemented?

In the FinTech world the metaphor of a sandbox where kids play with buckets and spades refers to a controlled environment within which a startup can develop and test their business model without complying to all regulatory requirements right from the start. However, such companies have to apply for that time-limited program at the FCA which supervises them during that time and only allows them to work with a limited clientele.

Besides the topic of a faster time-to-market supporters mention arguments like cost advantages, better access to financial support or the ability to test products on real customers in a controlled environment. Moreover, the UK approach has already found imitators who have developed similar concepts. These include not only countries in Europe, like Switzerland or Lithuania, but also Singapore and Hong Kong, for example.

Nevertheless, there are opposing opinions and countries or authorities that deliberately refuse to introduce this approach. Like Felix Hufeld they argue for example that a company which competes in a regulated market has to comply with the same standards as their competitors. They also talk about the risks involved for clients and the authorities. If such a startup goes bankrupt or betrays its customers because of weaker regulations and controls who are they going to blame? But not only authorities reject this approach but also startups. Some hold the opinion, that the introduction of regulatory sandboxes would weaken the confidence of customers in their products and also unsettle investors.

As it is the case for so many controversial issues, there probably is no easy answer to the question which side in this discussion has the better arguments or which way is more promising. Maybe the future will show us what concept better supports the success of startups in the industry.