Innovation hubs provide all the benefits associated with regulatory sandboxes, while avoiding most of the downsides, says a new paper from UNSW Law.
As regulators seek to support the development of fintech ecosystems, they should focus their resources on developing effective innovation hubs rather than stand-alone sandboxes, says a new research paper published by the University of New South Wales Faculty of Law.
The paper notes that over 50 jurisdictions have now established or announced “financial regulatory sandboxes”, which are most commonly understood to be a “tightly defined safe space” which automatically grants relief from some regulatory requirements for entities that meet its entry tests.
Other jurisdictions have announced or established “innovation hubs”, a portal or means by which industry can readily access regulators to discuss proposed fintech innovations, obtain guidance on navigating regulatory requirements, and potentially seek dispensations or adjustments in specific regulations.
The paper presents data on regulatory sandboxes and innovation hubs – which largely suggests that stand-alone regulatory sandboxes are not the most effective approach to building fintech ecosystems. However, a sandbox is particularly attractive to regulators as it promises to be pro-innovation without drawing unduly on regulatory resources.
The paper does highlight three key benefits of implementing a sandbox, however:
- The first is the message it sends to the market, signalling a regulator’s flexibility, approachability, propensity to support innovation and engage with innovative enterprises.
- The second is the boost to innovation, and the incentivises it provides financial services firms to accelerate their digital transformation programmes, while also promoting competition among financial centres to publish – and review – their dispensation policies.
- The third relates to how much the regulator stands to learn about innovation from fintech firms due to their freedom to operate and communicate openly.
However, the paper argues that innovation hubs provide all the benefits associated with regulatory sandboxes, while avoiding most of the downsides. In particular, it argues that many of the benefits typically attributed to sandboxes are the result of inconsistent terminology, where the benefits actually accrue from the work of innovation hubs.
Regulatory sandboxes require significant financial contributions, sometimes new legislation, and intense regulatory risk management, the paper says. Further, they often do not work as well on a stand-alone basis as innovation hubs – which by themselves can provide “more significant benefits to support the development of a fintech ecosystem”.
The paper concludes that regulators should focus their resources on developing effective innovation hubs rather than sandboxes, particularly where resources are limited. In many cases ”the maximum benefit” can be achieved by integrating an innovation hub and a sandbox together, it says.
While this may demand greater regulatory resources, it delivers pro-innovation benefits in line with this larger investment of resources.
The full paper is available here.
The authors of the paper are Ross P. Buckley (UNSW Australia); Douglas W. Arner (University of Hong Kong); Robin Veidt (University of Luxembourg); and Dirk A. Zetzsche (University of Luxembourg).