Matthew Field, Manager, Technology & Digital Policy, UK Finance
Authorities across the EU are increasingly serious about the creation of regulatory sandboxes – isolated frameworks set up by regulators to allow innovators, whether start-ups or large firms, to conduct live experiments in a controlled environment – to boost FinTech experimentation. This is a welcome move for our sector.
Not all regulators accept the need or desirability of such programmes, but those that do see sandboxes as a proven way to encourage innovation in financial services and grow their regulatory understanding of the new technologies, processes and business models that are, and will continue to, drive growth in the economy. In this, they are backed by FinTech firms large and small, and supported by a weight of evidence from around the globe.
The European Commission’s FinTech consultation from June 2017 asked several questions about the possible introduction of sandboxes in the EU. UK Finance’s response highlighted the importance of coordination across the EU. Although a single EU sandbox would be preferable, we also understand that an EU-wide approach would be challenging because supervision, which remains a key aspect of the regulatory sandbox concept, generally remains at national level.
Thus, in the absence of a single pan-EU sandbox, the European Commission and the ESAs should develop a coordinated EU approach on sandboxes, based on the ongoing harmonisation of national frameworks, the adoption of guidelines or principles, and the identification of best practices. UK Finance and its members believe national-level sandboxes will be more efficient and effective if they are coordinated by a European framework for FinTech experimentation, itself based on existing best practice.
To that end, UK Finance has consulted with its members to determine what we believe are the nine core principles that the European Commission and ESAs should encourage or mandate across the EU:
- Regulatory learnings should be shared publicly with both industry and regulators in other jurisdictions
- Relationships should be formed with regulators and sandboxes outside of the EU
- Work closely with data protection authorities
- Offer meaningful regulatory relief that is suitable for larger institutions subject to broader regulatory oversight
- Establish channels of communication that go beyond windows for application into the sandbox
- Have as a defined goal the identification of EU regulations that inhibit innovation
- Operate on a voluntary basis for market participants
- Sandboxes should be operated on an equal access basis
- There should be defined standards or guidelines for what concepts are eligible for entry into a regulatory sandbox
I want to focus on the first principle. One of most important benefits of an EU wide sandbox would have been the quick spread of regulatory learnings, both among regulators, but also firms who are keen to benefit from the experimentation of their peers. By regulatory learnings I mean anything from an approach to a new technology to the identification of unnecessary regulation that hinders innovation. This benefit could still be achieved to some extent by the publication and sharing of intelligence gained by various regulators as they engage with innovative firms and business models. The UK’s FCA has begun producing an annual report on the findings from their sandbox cohorts. This has been well received by industry and is an idea that European policy makers should strongly recommend to national regulators.
The systematic sharing of information is important in another regard. European officials are relying on market forces to encourage harmonisation and best practice among national regulators: if one jurisdiction creates a better regulatory sandbox then firms keen to innovate are likely to favour it over others. The problem with this reasoning is that the results of sandboxes are often slow to develop and difficult to determine.
Publicity helps, but cannot make up for the natural communication barrier that exists between regulators and the firms they regulate. Were regulators to systematically publish their findings, creating an open and forthright dialogue, it would give the market the information it needs to develop preferences. It would also have the added benefit of contributing to harmonisation of regulatory practice by allowing regulatory learnings to be used as precedent in other jurisdictions.
As seen in the recent draft of the FinTech Action Plan published by the EU FinTech Taskforce, a lot of thinking has gone into this area. We applaud the Commission for taking a proactive stance on this agenda. We hope that the voice of innovation, but also the voice of experience, will ring through as they consider how to push the EU’s FinTech ecosystem forward to the next level.