The Use of Regulatory Sandboxes in Europe and Asia

Global attention to money-laundering, terrorism financing and financial criminal practices has grown exponentially in recent years. As criminals constantly come up with new tactics, global regulations in the financial world are evolving all the time to try and keep up. At the same time, end users’ expectations are putting companies at commercial risk if they are not prepared to deliver outstanding and digital-first customer experiences through innovative solutions.

Among the many initiatives introduced by global regulators to address these two seemingly contradictory needs, regulatory sandboxes – closed environments that allow live testing of innovations by tech companies under the regulator’s supervision – are by far one of the most popular. As the CEO of a fast-growing regtech company working across both Asia and Europe, I have identified a few differences in how the regulators across different jurisdictions are engaging with the industry in general, and regulatory sandboxes in particular.

Since the launch of ‘Project Innovate’ in 2014, the UK’s FCA (Financial Conduct Authority) has won recognition for the success of its sandbox, where fintech companies can test innovative products, services and business models in a live market environment, while ensuring that appropriate safeguards are in place through temporary authorisation. The FCA advises companies, whether fintech startups or established banks, on which existing regulations might apply to their cutting-edge products.

So far, the sandbox has helped more than 500 companies, with 40+ firms receiving regulatory authorisation. Project Innovate has helped the FCA’s reputation for supporting initiatives which boost competition within financial services, which was part of the regulator’s post-financial crisis agenda. The success of the initiative in fostering a fertile fintech environment is reflected by the growing number of UK-based challenger banks that are expanding their client bases across Europe. Following its success, the sandbox approach has gone global, with regulators around the world adopting a similar strategy for fintech innovation.

Across Europe, regulators are directly working with financial services providers and taking proactive measures to not only encourage the use of innovative technology in improving their systems, but also to boost adoption by others within the ecosystem.

In 2015, the UK’s fintech membership body, Innovate Finance, launched its own regulatory sandbox. In the Netherlands, the AFM (Authority for the Financial Markets) and DNB (De Nederlandsche Bank) have been running a regulatory sandbox since 2016. The Central Bank of Ireland announced plans earlier this year to launch a fintech innovation hub, with the intention of engaging with all firms that are delivering innovation across the financial services sector . And now Lithuania is looking to introduce a blockchain sandbox in 2019, in an attempt to become the first ever country to offer the ability to create virtual companies on a blockchain.

Despite the differences between individual sandbox programmes, most European countries are broadly on the same page. Interestingly, the EBF (European Banking Federation) recently issued a paper recommending the creation of a Europe-wide fintech sandbox, which would allow companies to experiment with new cross-border financial services.

In August, the FCA announced the creation of the GFIN (Global Financial Innovation Network), a new alliance with 11 foreign regulators and related organisations from around the world. The introduction of the network builds on the FCA’s proposal earlier this year to create a ‘global sandbox’, with the declared purpose of reducing the time it takes to bring ideas to new international markets and providing a setting for regulators to collaborate on common challenges or policy questions in different jurisdictions.

Two of the 11 regulators that are part of the GFIN are the MAS (Monetary Authority of Singapore) and the HKMA (Hong Kong Monetary Authority). Their cooperation within the same international network is encouraging, and helps to offset a historical lack of regional cohesion in Asia up until now.

The case of China and Hong Kong is certainly an exception, as the two ecosystems have been growing more and more intertwined over the last few years (in fact Hong Kong Fintech Week will be co-hosted by both Hong Kong and Shenzhen this year). Specifically, Hong Kong-based fintech businesses integrate well into the Chinese ecosystem, and Chinese fintech companies – which are world-leading in terms of functionality – often choose Hong Kong when they “graduate” from their domestic market and seek international expansion.

China surely represents a unique case compared to the rest of the world. As financial regulations are still developing, the country’s fintech ecosystem is extremely vibrant as its regulatory structure allows for much faster changes and adjustments than in other parts of the world. And although China’s only regulatory sandbox programme was introduced only last month, it should be interpreted as a sign of change in the country’s traditional regulatory approach.

Additionally, one should not underestimate the impact that mobile phone penetration among the Chinese population is having in accelerating these changes; millions of people who never had a bank account before are now using services such as WeChat’s TenPay and Alibaba-backed Alipay all the time, skyrocketing the adoption rate of fintech solutions in a way that is unprecedented.

Although very different, Hong Kong’s ecosystem is also evolving rapidly. Regulators have started shifting their overall approach to financial technology, evident from the HKMA’s introduction of a new regulatory regime for virtual banks, for which 29 companies submitted applications in the first batch of approvals. New challenger banks and app-based financial providers like reflect the pace at which Hong Kong is evolving.

This is also mirrored by the number of sandbox initiatives available in the country, such as:

  • The SFC (Securities and Futures Commission) Regulatory Sandbox, launched to provide a confined regulatory environment for qualified firms to conduct regulated activities utilising financial technologies.
  • The FSS (Fintech Supervisory Sandbox), launched by the HKMA in September 2016, allowing banks and their partnering technology firms to conduct pilot trials of their fintech initiatives involving a limited number of participating customers without the need to achieve full compliance with the HKMA’s supervisory requirements.
  • The SFC’s regtech project being piloted with twenty banks to monitor and detect systemic risk.
  • The Insurance Authority’s Insurtech Sandbox, launched to facilitate pilot runs of innovative insurtech applications by authorised insurers.
  • Cyberport, a business park in Hong Kong which supports 260 fintech start-ups in a co-working environment.
  • The HKMA’s Open API framework for the banking sector, published in July, outlining a four-phase approach to implement various Open API functions, with Phase I deployment expected within the next six months.

Meanwhile, Singapore launched its own Fintech Regulatory Sandbox back in June 2016, with the declared aim of testing innovative solutions and providing better clarity on whether a new financial product or service complies with legal and regulatory requirements. Depending on the nature of the experiment, MAS has announced that it “will provide the appropriate regulatory support by relaxing specific legal and regulatory requirements, which the sandbox entity will otherwise be subject to, for the duration of the sandbox”.

Singapore’s MAS is known as a particularly progressive regulator, especially following the introduction of the Smart Nation initiative. Officially launched in November 2014, this project aims to develop tech solutions to address urban challenges, through a mix of technology deployments and strategic investments from the government. As part of this effort, MAS has rolled out various programmes to foster the development of a fintech and regtech ecosystem in Singapore, including the annual Singapore Fintech Festival, the biggest fintech event in Asia, sponsored and organised by the MAS.

At last year’s Festival, MAS managing director Ravi Menon unveiled some of the measures that the Singapore regulator would be introducing, including:

  • setting aside SGD 225 million (USD 165 million) for fintech development over the 2018-2022 period;
  • a shared KYC (know your customer) utility to centralise customer verification, ID authentication and AML (anti-money laundering) screening for local and international financial institutions; and
  • a cross-border trade finance platform, developed together with HKMA, to go live in 2019.

As these and many other examples show, Asia has huge potential for fintech and regtech developments, particularly with numerous financial institutions from mainland China now expanding overseas, often through Hong Kong. The region presents a unique mix of technological advancements and interconnected economic and regulatory systems, which makes it the perfect environment for rapid business growth for fintech and regtech companies with ambitious goals.

Claus Christensen is CEO at Know Your Customer Ltd, which is participating in the 2018 Fintech Innovation Lab Asia-Pacific (Accenture’s 12-week accelerator programme until October), as well as appearing at Hong Kong Fintech Week (29 October – 2 November) and Singapore Finech Festival (12-16 November). 

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