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Ca Se StUD y 6 Case Study 6 277

Cloud Solutions that Test for Consumer Risk and Financial Stability

In 1986, Europe’s pre-eminent financial centre in the city of evaluating new technology infrastructures, including those
London was de-regulated, giving its financial services industry, based on cloud. In Europe, the Sandbox toolkit developed by the
centered on the London Stock Exchange, a major boost that United Kingdom’s Financial Conduct Authority (FCA) in 2015
enabled it to expand beyond the relatively constrained confines is indicative of the financial regulation that is intended to mini-
of its physical borders. This was termed a ‘Big Bang’ at the time, mize risk to consumers of new financial products and services
and continues to be a useful metaphor and short-hand today. while at the same time preserving general financial stability. The
This enabled financial services companies and banks, in par- FCA describes the Sandbox as
ticular, to do business more freely between themselves, their
customers, and their international counterparts in Africa, Asia, “. . . a regulatory sandbox that is a ‘safe space’ in which businesses
can test innovative products, services, business models, and deliv-
the Middle East, the United States, and other European coun- ery mechanisms without immediately incurring all the normal
tries. Parallel regulatory developments were also taking place regulatory consequences of engaging in the activity in question …
in other regional financial centers, including Singapore and a sandbox could allow a firm to make their advice platform avail-
Japan, centered on their respective stock exchanges. Although able to a limited number of consumers. As a safeguard, once the
regulation of the financial services industry continued to be of advice is issued, but before transactions are executed, financial
critical importance to the government and regulators alike for advisers would review the advice. This would allow firms to learn
how consumers interact with their advice platform and how their
reasons of consumer protection and general financial stability, algorithm performs compared to human assessment.”
it was believed that a lighter touch approach was appropriate at
a time when information technologies were emerging as major From this description of the sandbox, it is clear that the new
business tools and replacing an increasing number of manual product or service to be tested is conducted under real-world
processes. conditions involving real consumers who remain subject to legal
In 1986, regulatory authorities continued to use tradi- rules. Other constraints, which could put them at risk and be
tional approaches to audit and regulate, which relied predomi- detrimental to the result, also need to be carefully considered
nantly on the paper documents and records of transactions before testing.
that were certified by accountancy and ratings agencies accord- The FCA has proposed a virtual sandbox based on a Cloud
ing to the prevailing legal requirements of the time. In 1997, solution to address the real-world concerns that will simulate
the majority of the manual processes of conducting financial the real-world data and interactions between the consumers
services industry business had moved to information systems and the new financial product or service being tested. The FCA
involving computer screen- based trading. By the 2000s, huge describes this as
advances in computing power coupled with highly sophisti- “. . . a cloud-based solution set up and equipped in collaboration
cated financial algorithms meant that new, innovative financial between the industry, which businesses then could customize for
products were being developed and traded in the same way as their products or services, run tests with public data sets or data
the more traditional ones. However, it soon became apparent provided by other firms through the virtual sandbox, and then
after the onset of the global financial crisis of 2007 that the invite firms or even consumers to try their new solution. In this
increasingly light touch to financial regulation, which was also environment, there is no risk of consumer detriment, risk to
market integrity or financial stability while testing.”
a feature of this time, was inappropriate in light of the highly
technical nature of the computer-based transactions and the On the back end, the ‘sandbox’ Cloud uses Microsoft’s Azure
speed of innovation in the financial services industry. product to provide a scalable, elastic storage. When financial
With the advent of economic recovery in 2013, regulators services companies wish to simulate their new products and
sought to introduce a regulatory framework that is sensitive services, they submit their algorithm to the ‘sandbox’ Cloud
to the creation of innovative products and services emerg- for storage, and processing, to test aspects of this, including
ing from the financial services industry while at the same the business model, with respect to regulatory requirements
time applying an appropriate level of regulation. The major and risks to the consumer. The results of the simulation
regional financial centers and their respective regulators were determine whether the model or some other aspect of the
looking closely at the role new technology trends could play new financial product or service need adjustment (as codi-
in transforming the financial services industry. The Monetary fied in the algorithm) to bring these within acceptable risk
Authority of Singapore (MAS) was evaluating ‘FinTech’, and profiles for the consumer and the more general financial
the Financial Services Agency of Japan (FSA) and its ‘FISC’ were environment.