knowledge | 13 September 2018 |
FinTech Developments: Global Sandboxes and Innovation Hubs
The financial services sandbox is set to go global. In August 2018, 12 financial services regulators published a consultation on the establishment of a global sandbox for firms seeking to test their innovative ideas in multiple jurisdictions (the “Consultation”). For its part, the Central Bank of Ireland (“Central Bank”) has set up its own innovation hub as well as an industry engagement programme for fintech firms. Additional developments are taking place at EU level.
The Financial Services Sandbox
Regulatory sandboxes are controlled ‘safe spaces’ in which innovative products, services, business models and delivery mechanisms can be tested without immediately being subject to all of the regulatory requirements. See our previous briefing here.
The idea of sandboxes has been widely adopted across a number of financial services regulators in order to support and facilitate the introduction of new innovative technologies and business models and to allow regulators to learn about those technologies and models.
There is no single sandbox model and financial services sandboxes differ in a number of ways, including in the type of support available to firms, the way in which sandboxes are run, and the difference in regulatory or legal regimes. In particular, while some sandboxes come with a licensing exemption, other regulators require firms to apply for a restricted authorisation in order to test their ideas.
In February 2018, the UK Financial Conduct Authority published a proposition document on the idea of a “global sandbox” to help firms looking to develop technology in areas where cross-border testing is particularly important, such as anti-money laundering. Subsequently, the FCA convened an event during March 2018 with a group of international stakeholders to discuss the opportunities associated with establishing a Global Financial Innovation Network (GFIN)
The Consultation was published by 12 regulators and related organisations1, and follows on from the FCA’s earlier efforts. It includes a mission statement setting out the role the regulators see GFIN playing in supporting responsible innovation. It also sets out the three main functions that GFIN could perform and why they constitute an important part of the GFIN.
Network of Regulators
To date, a number of regulators have signed bi-lateral co-operation agreements with the goal of improving information sharing on innovation related themes. GFIN would offer a new multi-lateral collaborative framework for regulators to pool knowledge and share their experiences of new market developments.
GFIN would be made up of an overarching group as well as a number of sub-groups. The overarching group would contain all GFIN members, which would share intelligence relevant to the members, highlight key pieces of domestic work, or discuss emerging innovation trends. The sub-groups would then focus on various topics and members would opt in to those groups depending on the members’ interests. Sub-groups would feed back into the overarching group on a regular basis.
The network of regulators would seek to help firms navigate areas such as exploring international expansion or cross-border policy issues. It would provide easily accessible information about relevant contacts for firms, including sign-posting opportunities for support and/or on-going initiatives within members of GFIN.
Joint Policy Work and Regulatory Trials
Different regulatory barriers can act as a barrier to realising or rescaling new ideas across markets. The GFIN could potentially act as a tool for identifying these areas of divergences, focusing on emerging technologies, how they interconnect with emerging business models and the implications for the direction of regulatory policy. It would also provide a mechanism by which the future of certain policy debates could be discussed between regulators, industry, academia and other relevant stakeholders.
Types of policy work that members could collaborate on include publishing the findings from cross-border trials and how they have informed evolving policy positions. It could also include comparative market studies or common areas of interest, to understand different regulatory approaches and future possible areas of convergence. There is also a potential for members to collaborate on trials involving new approaches to Regtech and Suptech.
Cross Border Trials
Currently innovation initiatives operated by financial services regulators tend to be domestically focused and there is no global platform allowing firms to trial new ideas with consumers or other market participants in multiple jurisdictions working with the appropriate regulatory authorities.
GFIN could allow firms to trial innovations or business models across multiple jurisdictions. Firms applying to conduct a cross border trial would be required to meet certain prerequisites for entry into the global sandbox, determined by the regulators involved. Regulators would specify, when joining GFIN, whether supporting trials is something they could facilitate and it will be for the relevant regulators to determine their level of engagement.
During the trial, firms would be required to provide information and other assistance to those regulators involved so that they can monitor its progress. Once the trial is finished, the aim would be to provide the firm with sufficient information about the merits of the product or service and how it benefited consumers or the wider financial services market. The results of the trial could potentially inform future licensing decisions of the firm involved, or help provide clarity on how emerging technologies or business models fit within the regulatory framework.
Following the close of the consultation on 14 October 2018, the regulators involved in the Consultation will review feedback and agree on next steps, including a timeline for launching the GFIN.
Promoting fintech is a key part of IFS2020 which is a “whole-of-Government” approach to driving the growth and development of international financial services in Ireland. Earlier this year, the Central Bank launched the Innovation Hub which allows fintech firms to engage with the Central Bank outside of existing formal regulatory/firm engagement processes. The purpose of the Innovation Hub is to act as a resource to help innovators navigate the regulatory landscape by providing information on:
- relevant parts of the regulatory regime;
- specific supervision rules and policies; and
- navigating the Irish supervisory and regulatory landscape.
The Innovation Hub is open to enquiries from individuals, new fintech firms and existing firms which provide or intend to provide financial products or services that are innovative and sufficiently mature. A financial product or service will be innovative if it is based on new technology which:
- does not already exist in the Irish market or has not been rolled out on a significant scale; or
- materially changes the manner in which an existing product or service is constructed or delivered.
To be mature, the relevant firm must be able to show an appropriate amount of thought in developing the idea.
You can find further information on the information hub here.
The Central Bank is also planning to host a series of fintech and innovation events, bringing together fintech and innovation individuals and companies with Central Bank staff to exchange views on the regulatory landscape, new and upcoming technologies, and issues facing the fintech sector.
In March 2018, the European Commission published a communication outlining its FinTech Action Plan. Among other things, that Action Plan states that the European Commission will present a report with best practices for regulatory sandboxes in early 2019 (Q1). See our earlier briefing here.
Financial innovation remains a key focus of regulatory attention, and is likely to continue to do so for the immediate future. The main challenge for regulators is to reconcile the exciting technological opportunities being created by fintech firms, with the need to ensure consumer protection and guard against systemic risk.
The regulatory sandbox is a popular choice for responding to these challenges at domestic level. However, not all regulators are fully convinced of this choice. As is clear from the above, the Central Bank has chosen to focus on facilitating regulatory contact between innovator and the Central Bank as an initial step, instead of immediately establishing a sandbox.
Diverging national approaches to the sandbox issue are capable of giving rise to challenges at both EU and international level for regulators and innovators alike. The emergence of EU standards and a global approach could prove helpful in resolving these challenges.
- The organisations involved in the GFIN at present are: Abu Dhabi Global Markets; Autorité des marchés financiers (Québec); Australian Securities & Investments Commission; Central Bank of Bahrain; United States Consumer Financial Protection Bureau; Dubai Financial Services Authority; Financial Conduct Authority (UK); Guernsey Financial Services Commission; Hong Kong Monetary Authority; Monetary Authority of Singapore; Ontario Securities Commission; and Consultative Group to Assist the Poor (CGAP)
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.