As Fintech companies and their services continue to evolve, regulators should not be caught ‘off guard’ with the most innovative business models. The first so-called ‘Regulatory Sandbox’ in the financial field saw light in the UK in mid-2016. Public authorities would be able to provide a controlled environment where FinTech companies would not find strict rules that hinder their growth and innovation whilst the protection of consumers is ensured.
In light of the UK efforts to ease the FinTech companies growth, the Spanish Ministry of Economy and Business followed suit and published the preliminary draft bill for the Law of ‘digital transformation of the financial system’ on 10 July 2018. The Draft Bill aims to take advantage of new services related to the financial system arising because of the use of new technologies, which provide benefits both to financial services providers and consumers, through the promotion of growth in the number of services and their quality while gaining knowledge on the latest developments. The draft bill would essentially regulate the establishment in Spain of the internationally called ‘Regulatory Sandbox’.
For those not privy to Regulatory Sandboxes yet, they are a tool that embodies a set of provisions covering the controlled and targeted conduction of tests on projects that are suitable to render technology-based innovation in terms of financial services. The notion ‘sandbox’ conceptually refers to a sand-filled box area where children experiment and play in a controlled environment, which would subsequently refer to testing innovative business models that the regulations in force would not be capturing. At the very core of the Regulatory Sandbox concept there is the underlying legal status that most regulatory figures share in the financial arena. From a regulatory standpoint, financial figures are usually restricted in the business they can pursue while being regulated, hence the legal need to have the most adapted regulatory requirements.
The implementation of the ‘Regulatory Sandbox’ within a financial market may therefore involve many benefits for both entrepreneurs and the regulator. In the entrepreneur’s instance, it would allow to verify the technical and economic viability of a project prior to incur in all the expenses that would involve an administrative authorization for a regulated service, which would ease the funding of an innovative project. Therefore, inasmuch as the regulator would be more aware of the occurring innovations, it would be easier to forestall eventual risks for consumers and to adjust the regulations and legal requirements.
It is important to note what the requirements to use the sandbox established by Spanish authorities would be. Innovative projects aiming at sheltering under the Regulatory Sandbox in Spain would have to provide certain added value –in order to be deemed as innovative– to the existing financial services in terms of quality, market efficiency, procedural enhancement or standardization or else improve the way that public authorities supervise financial services.
FinTech companies would have to send an application to the General Treasury and International Funding Secretariat in order to use the Regulatory Sandbox. Applications shall include an explanatory report detailing the project and the way they comply with all the established requirements, including how the company would comply with the guarantee scheme that will be addressed hereunder. Received applications would be forwarded to competent authorities (i.e. the Bank of Spain, the Spanish National Stock Market Commission and/or the General Insurance and Pension Funds Directorate), who would evaluate them, and only those companies meeting the cited requirements would see their applications sent back to the Secretariat. A project with a favorable prior assessment would have the ‘green light’ for the project promoter and public authorities to start collaborating into the implementation of a controlled environment –testing protocol- for the project to be tested.
The draft bill for the Law of ‘digital transformation of the financial system’ also envisages a guarantee scheme to protect participants in the Regulatory Sandbox. This guarantee scheme would be primarily aimed at covering potential liabilities for the damages caused to test participants but also includes provisions for data protection, withdrawal rights and confidentiality. Participants would have to give consent, having been previously informed, to freely and willingly use the sandbox. Promoters must also bear in mind that the draft bill states that losses from the market fluctuations would not be deemed as damages. It is worth noting that either the promoter or the supervisory authorities may interrupt the tests if justified reasons are met.
Once the tests come to an end, the project promoter would elaborate a memorandum evaluating the results obtained to be forwarded to the competent supervisory authorities. In case these tests lead to a satisfactory activity, the supervisory authorities may grant a license that would devise the transition process from the testing controlled environment to the scheme of an ordinary activity. This may include simplifying the access requirements and applying a thorough proportionality criterion –meaning that it should be applied the least restrictive measure and be justified to protect the public interest–. In this case, the innovative project of a FinTech company may be deemed as a suitable asset for the investment of venture capital entities and the proportionality principle for the project authorization would be explicitly established.
Apart from the Regulatory Sandbox, the draft bill also envisages additional measures to favour the digital transformation such as the set up of specific means to communicate with supervisory authorities or a box for private written consultations with competent authorities. Likewise, the draft bill ensures a thorough cooperation between the supervisory authorities for the proper functioning of the testing controlled environment.
Although still a mere draft bill (in the public audience stage until the 7 of September of 2018) and many features thereof may be changed in the final text of the Spanish Law for the ‘digital transformation of the financial system’ (i.e. the specific requirements for entering the Sandbox), it would be beneficial to stress the paramount importance of projects to be mostly innovative in order to be accepted into the Regulatory Sandbox.