Unregulated firms should have access to regulatory sandboxes

Chambers: Sandboxes can level the playing field

Legal regulators should allow unregulated firms to test their ideas in regulatory sandboxes set up to foster innovation, the Legal Services Consumer Panel has said.

The panel also said legal regulators should work together on sandboxes, for example on property law or wills, to avoid duplication.

Regulatory sandboxes are a ‘safe space’ in which to test innovations amid enhanced scrutiny but without the usual regulatory penalties for technical breaches.

The Solicitors Regulation Authority (SRA) has one in the shape of SRA Innovate – while the recently launched LawtechUK will include a sandbox bringing together the private and public sector to support “truly innovative initiatives looking to reinvent how legal services, processes or systems are delivered”.

In a paper on developing regulatory sandboxes to encourage innovation, the consumer panel said the Financial Conduct Authority (FCA) had pioneered the use of regulatory sandboxes since 2016 and other sectors had followed.

“The Covid-19 pandemic has exemplified the need for innovation in historically traditional sectors, with changes in consumer behaviour and the take-up of technology accelerating at a pace never before seen.

“Consumers are becoming increasingly reliant on technology to access support for medical advice, banking services and even legal advice from their homes.”

The LSCP said that, as a result, legal regulators would have to assess whether their rules were a “hindrance or barrier to innovation”.

In its business plan for 2019-20, the Legal Services Board (LSB) committed to carrying out a project on sandboxes.

A review by the FCA of its sandbox found that it led to a marked reduction in the time and cost of getting innovative ideas to the market and ensured that consumer protections were built in “from day one”.

Experimentation could also identify “regulations that may be inhibiting innovation”.

The LSCP recommended that, in their approach to sandboxes, legal regulators should use eligibility criteria that were “straightforward and not overly prescriptive” and where necessary prioritise services for vulnerable consumers.

Regulators should provide “detailed feedback” on those schemes that were deemed not to be eligible and be prepared to hold further discussions with applicants about disruptive business models.

The LSCP recommended that legal regulators should follow the FCA’s lead in giving access to the sandbox to unregulated firms.

“The panel would welcome this approach in the legal services sector because it allows the latter to test their innovation, adhere to regulated standards and prevent potential consumer harm before launch.”

Consumers should be made aware of the risks before the testing phase and provided with “clear and accessible information” allowing them to make an informed decision about whether to take part.

“Given that the legal services sector has multiple regulators, we would encourage the LSB and the regulatory bodies to consider the challenges of having multiple sandboxes running simultaneously.

“The regulators should consider working together where there is common interest, e.g. looking at property law, wills or probate. For regulators, this would avoid the duplication of resources and ensure consistency.”

The LSCP warned that participation in a sandbox may “inadvertently signal to consumers” that regulators had endorsed the product.

“To avoid such confusion, firms should undertake the appropriate disclosures to consumers to clarify that the regulator bears no legal responsibility for the service provided.”

The panel urged regulators to grasp “with both hands” the unique opportunity that sandboxes offered “to quickly draw lessons from the consumer testing stage and update their regulatory framework accordingly”.

Sarah Chambers, chair of the LSCP, commented: “Sandboxes can level the playing field between more established firms and new entrants to the market.

“We encourage regulators to be open-minded in their engagement with applicants who want to be a part of such a process.”

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