Corporate

Innovation Facilitators such as innovation hubs and regulatory sandboxes are receiving a good degree of regulatory interest at the moment. The number of such innovation facilitators in the EU has grown rapidly in recent years. As at the date of the report noted below, 21 EU Member States and 3 EEA States had established innovation hubs and 5 EU Member States have regulatory sandboxes in operation.

Jargon Buster

“innovation hubs”

These are dedicated information sources and points of contact for firms designed to allow them to raise enquiries with competent authorities on FinTech-related issues and to seek non-binding guidance on regulatory and supervisory expectations, including licensing requirements Click here for our discussion of some issues currently being grappled with in the UK and Dutch innovation hubs

“Regulatory sandboxes”

 These are schemes to enable firms to test, pursuant to a specific testing plan agreed and monitored by a dedicated function of the relevant competent authority, innovative financial products, financial services or business models

 

Regulatory trends and ESA survey

Not everyone likes a sandbox. The New York State Department of Finance for example objected in no uncertain terms to the US Department of Treasury’s endorsement of Fintech Sandboxes commenting that:

 “Toddlers play in sandboxes. Adults play by the rules. Companies that truly want to create change and thrive over the long-term appreciate the importance of developing their ideas and protecting their customers within a strong state regulatory framework”

In terms of regulatory trends, however, the NY Department of Finance seems to be an outlier.

This month the European Supervisory Authorities (ESAs) published a joint report on innovation facilitators giving a comparative analysis of the innovation facilitators established to date within the EU. The ESAs also set out best practices for the design and operation of innovation facilitators, intended to:

  • promote consistency across the single market in the design and operation of innovation facilitators;
  • promote transparency of regulatory and supervisory policy outcomes
  • facilitate cooperation between national authorities, including consumer and data protection authorities.

 

International Collaboration

One point noted in particular by the ESAs was that each of the innovation facilitators reviewed currently operates on a national level within the EEA (although see below for the UK Financial Conduct Authority’s global approach). This has been flagged as a potential factor which could impede the scaling up of financial innovations across the EU, particularly if:

  • different competent authorities adopt different regulatory and supervisory stances towards the same innovation leading to challenges in extending the innovation in more than one Member State. (and the report also notes that this could present risks in terms of ‘forum shopping’ and regulatory arbitrage, undermining the level playing field); or
  • firms who have tested successfully innovations in a regulatory sandbox in one Member State face practical barriers to the application of these innovations in other Member States. (for example requiring to explain again at length the concept of the innovation and measures to mitigate any risks, or requirements to retest again the proposition causing delays to roll-out).

Accordingly the ESAs propose to consider joint guidance on cooperation and coordination between innovation facilitators and the creation of an EU network to bridge innovation facilitators established at the Member State level.

The importance of scalability across jurisdictions is a point which has not been lost on the Financial Conduct Authority which announced in August of last year a collaboration with 10 other non-EEA regulators to consult on and create a “Global Financial Innovation Network”

 

In conclusion…

All of which is good news for the Fintech sector, which will no doubt be considering the ESA’s comparative table with some interest and packing up their spades and buckets for some sandbox visits.

For more information on Fintech regulatory developments contact Karen Fountain or your usual Brodies contact.

Karen Fountain

Karen Fountain

Partner at Brodies LLP
Karen is a partner at Brodies in the corporate team. She has over 20 years' experience of advising leading financial institutions, funds and intuitional and strategic investors across the globe with a broad range of matters.
Karen Fountain