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In response to the rapid changes in the financial technology (fintech) market, many regulators have introduced a special legal regime for companies in the sector, which allows them to test new solutions in a secure, controlled environment without the risk of violating existing laws. This mode is called the regulatory sandbox.
The United Kingdom has become a pioneer in the field of regulatory sandboxes and business accelerators for FinTech companies. The UK Financial Conduct Authority (FCA) launched the first such project in June 2016 as part of its comprehensive Project Innovate initiative. The FCA sandbox allows fintechs to test innovative products and services in a secure, productive environment with appropriate consumer protection mechanisms. If necessary, participants are also partially exempted from compliance with mandatory standards.
Following the UK, the new approach has become increasingly widespread not only in developed countries, but also in developing countries. Various governments around the world are implementing a regulatory sandbox mechanism to test the effectiveness of new fintech approaches in a specific low-risk environment. Australia, Singapore, Switzerland, Canada, Hong Kong, Malaysia, Thailand, Indonesia and many other countries have decided to create their own “sandboxes”, the number of which continues to grow.
Many countries believe that this concept can help not only develop proper rules and regulations for new products, services and business models, but also promote innovation and make the national economy more attractive to foreign companies and start-ups.
However, it must be understood that there is no one-size-fits-all approach and that different countries must take into account different factors when introducing innovative regulatory regimes to meet their economic needs.
A careful analysis of recent events shows that regulators around the world are now rethinking their approaches and adopting flexible, collaborative models to cope with the challenges posed by new technologies.
For example, in 2019, the Australian government was forced to review the existing regulatory sandbox regime due to its low efficiency and lack of popularity among companies. As a result, the list of financial products and services that meet the selection criteria was expanded, and the testing period was extended from 12 to 24 months. Regulators believe that these changes will help improve the Australian fintech ecosystem and attract more companies to the market.
In turn, the Monetary Authority of Singapore recently introduced a new Sandbox Express mode, which is designed to improve the availability of the national platform for the implementation of fintech projects and reduce the testing time for new solutions. The selection process for companies with low or well-understood risks has become simpler and clearer, since all applicable conditions and restrictions are now known in advance.
Recent research has shown that legislative and regulatory initiatives in innovation areas may be less effective when they are limited to one jurisdiction. This is especially true for countries with similar legislation (eg EU member states). It will be good if regulators in different jurisdictions can use a harmonized approach that allows fintech companies from different countries to test their products in a regulatory sandbox.
For this reason, the FCA, as one of the leading regulators in this field, has initiated the creation of an international “sandbox”, within which influential supervisory authorities around the world will join forces to form a single network that provides innovative FinTech companies with a comfortable environment for interacting with regulators. and allowing them to implement solutions across national borders. In addition to providing a forum for companies to work together and fruitful discussions, such a network will also help regulators collaborate and share experiences, business models, new ideas and approaches. Initially, the network included 12 regulators from various countries, and today their number is about 50.
It is important to note that the sandbox concept also has its drawbacks. This mechanism should not be seen as the only viable tool for developing the innovation environment in a single country. Given the many restrictions (maximum number of participants, testing period, etc.), the regulatory sandbox regime alone is not enough to take into account all the needs of the developing fintech industry.
In addition, the objectives of some companies that choose to participate in such an initiative may differ from those of the regulators. For example, the results of a Deloitte survey of current and former FCA sandbox participants showed that most companies highly appreciated the marketing role of this project. They are confident that participation in it has increased their credibility among investors and clients. This fact increases a side risk, the occurrence of which is perhaps inevitable: the introduction of a regulatory sandbox regime may create unequal competitive conditions for start-ups that meet the eligibility criteria and those that do not.
In an effort to build an efficient fintech ecosystem, many countries (including most European countries) have decided to create innovation centers that make it easier for players to interact with regulators by acting as a link through which to report their problems to them and seek advice. A number of studies emphasize that in some cases preference should be given to innovation centers, since they bring comparable benefits and at the same time minimize the disadvantages of regulatory sandboxes. At the same time, the results of many studies show that both types of tools are more effective when they complement each other, but not when one of them serves as a substitute for the other.
In conclusion, we note that although the concept of a regulatory sandbox does not lose its relevance and significance, there is definitely potential for its further improvement. Creating a special regulatory environment for fintechs that will allow them to conduct cross-border activities can definitely be called the next important task that regulators have to solve.
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