Financial Conduct Authority approves artificial intelligence sandbox

As Artificial Intelligence (AI) continues to advance, it is inevitable that more and more businesses will seek to utilise and benefit from the technology. In addition, many businesses will be looking to introduce their own AI products, and in particular, within the financial services sector.

In recognising this, the Financial Conduct Authority (FCA) has recently created a regulatory sandbox for use within the financial sector, allowing financial firms to experiment with AI technology in a safe and controlled environment. The sandbox allows firms to test their products in the market with real consumers.

The initiative is part of the ‘AI Lab’ operated by the FCA, which focuses on supporting innovators develop new AI models and solutions. It is hoped that by affording firms the opportunity to use the sandbox, it will help with the development of AI products that drive growth, competitiveness and innovation in the sector. In addition, through collaboration, the FCA intends to approach any FCA regulations to be introduced surrounding AI financial products in a practical way.

To be eligible for the FCA’s sandbox, firms must meet certain criteria to ensure that participation is purposeful and beneficial. Proposals must be intended for use in the UK financial services market and involve regulated activities or support regulated firms.

Solutions must show genuine innovation – whether a new product, a new approach to an existing idea, or targeting an unmet market need. This could include tools for underserved customers or improving diversity and inclusion.

Proposals must deliver a clear consumer benefit – such as reduced costs, greater access, or improved efficiency – while protecting consumers from undue risk. Firms must demonstrate a need for them to take part in the sandbox, for example, where their innovation does not fit existing regulation, making market entry difficult or costly. The FCA provides support and supervision for such tests.

Firms should have a developed version of the product, an understanding of relevant regulations, clear objectives and success metrics, identified risks, and committed testing partners.

AI is reshaping financial services by enabling personalised advice, better fraud detection, automation, and 24/7 customer support. These advances improve management, security, and access for consumers, and expand product offerings. For institutions, AI increases efficiency by automating tasks and reducing costs, allowing staff to focus on strategy. It strengthens risk and compliance management through advanced analytics and reporting, giving firms a competitive edge with more responsive and personalised services.

The regulatory sandbox and AI Lab let firms test AI safely under expert supervision, with access to technical resources and regulatory guidance. The FCA will also launch a live AI testing service for real-market trials of AI models under close oversight, offering tailored support and flexibility as regulations evolve.

By supporting responsible AI innovation, the FCA aims to unlock AI’s potential whilst maintaining trust and protecting consumers, positioning the UK financial sector as a leader in safe, effective AI integration.

Applications for the sandbox can be made through the FCA’s website, and successful applicants will have the opportunity to test their AI proof of concept from October 2025.

Erin Findlay, Solicitor: efi@bto.co.uk / 0141 726 0911

Laura Patriche, Trainee Solicitor: lpa@bto.co.uk / 0131 381 5041

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