As outlined in Part 3 of this series of posts giving updates on the European FinTech regulation agenda, the envisaged harmonized regulatory framework for financial innovation within the Single Market will be based on a comprehensive understanding of the innovative landscape within the financial market. Building the knowledge takes time and effort. It took EBA three and a half months after laying out its FinTech Road Map to publish the first analyses which form part of the FinTech Knowledge Hub.
The Knowledge Hub aims at fostering a better understanding of the innovative landscape within the financial market through facilitating the exchange of information between European and national regulators, innovators and technology providers. On this basis, a regulatory framework can be built that will fit the market’s demands and will support new innovative business models.
In contrast to the European approach, the Financial Conduct Authority (FCA) in London approaches the support for FinTechs in what seems to be at a first glance a more rapid way. Already in February 2018 the UK regulator encouraged the idea of a “global sandbox.” A regulatory sandbox allows the provider of innovative technology to offer his or her idea to a certain number of potential clients within the financial market for a limited period of time without the application of the full set of compliance, license and capital requirements. During this time the provider can assess if his or her innovative approach is worth the investment of full regulatory compliance. In the UK the possibility for FinTechs to approach the market via a regulatory sandbox has been successfully established in 2016.
Driven by the understanding that major emerging innovation trends (such as big data, artificial intelligence and blockchain based solutions) are increasingly global, rather than domestic, in nature, in February 2018 the FCA started an international dialogue with firms doing business, or looking to do business, in the UK or overseas, regulators, consumers, or any other interested party to assess what a global sandbox could look like. The FCA received 50 responses to their call in February with an overall positive feedback. Key themes to emerge in the feedback were:
Regulatory co-operation: Respondents were supportive of the idea of providing a setting for regulators to collaborate on common challenges or policy questions that firms face in different jurisdictions.
Speed to market: Respondents saw as one of the main advantages for the global sandbox that it could be reducing the time it takes to bring ideas to new international markets.
Governance: Feedback highlighted the importance of the project being transparent and fair to those potential firms wishing to apply for cross-border testing.
Emerging technologies/business models: A wide range of topics and subject matters were highlighted in the feedback, particularly those with notable cross-border application. Among the issues highlighted were artificial intelligence, distributed ledger technology, data protection, regulation of securities and Initial Coin Offerings (ICOs), know your customer (KYC) and anti-money laundering (AML).
Building on the FCA’s proposal to create a global sandbox, on 7 August 2018 the FCA has, in collaboration with 11 financial regulators and related organisations, announced the creation of the Global Financial Innovation Network (GFIN). The FCA is the only European regulator within GFIN. The other members are the Abu Dhabi Global Market (ADGM), the Autorité des marchés financiers (AMF, Canada), the Australian Securities & Investments Commission (ASIC), the Central Bank of Bahrain (CBB), the Bureau of Consumer Financial Protection (BCFP, USA), the Dubai Financial Services Authority (DFSA), the Guernsey Financial Services Commission (GFSC), the Hong Kong Monetary Authority (HKMA), the Monetary Authority of Singapore (MAS), the Ontario Securities Commission (OSC, Canada) and the Consultative Group to Assist the Poor (CGAP).
The idea of GFIN is to:
- act as a network of regulators to collaborate, share experience of innovation in respective markets, including emerging technologies and business models, and communicate to firms;
- provide a forum for joint policy work and discussions; and
- provide firms with an environment in which to trial cross-border solutions (business-to-consumer (B2C) or business-to-business (B2B)).
With the announcement of the creation of GFIN, the FCA also published a consultation document laying out a mission statement for GFIN and the idea of a global sandbox which is still based on the FCA’s concept thereof published in February. The consultation is addressed to innovative financial services firms, financial services regulators, technology companies, technology providers, trade bodies, accelerators, academia, consumer groups and other stakeholders keen on being part of the development of GFIN and will be running until 14 October 2018.
Although the knowledge centered approach of the EU for a regulatory framework for FinTechs within the Single Market surely is a reasonable approach, an international approach could have the advantage of providing speedier solutions and create a competitive advantage. With Brexit on the horizon, the FCA’s approach seems sensible and certainly a good move to keep their financial market up to date.
