‘Structured experimentalism’: innovation hubs and sandboxes

In this scenario, an evolving trend is to provide a flexible and supportive regulatory environment, with the purpose of encouraging the development of FinTech, eliminating obstacles and disseminating good practice, in addition to experimenting with new models before introducing stable regulations.

For this reason, an increasing number of countries have introduced innovation facilitators, through the establishment of regulatory sandboxes28 or innovation hubs,29 pilot programs and incubators or innovation offices. At EU level, the European Forum for Innovation Facilitators and the EBA’s FinTech Knowledge Hub were set up with the aim of promoting a common understanding of new technologies and their application. Innovation hubs provide firms with non-binding guidance on the conformity of their proposed business models with regulatory requirements, including any regulatory perimeter and authorisation requirements. Most EU Member States have established innovation hubs, while others have so far introduced regulatory sandboxes.30 The latter are more complex instruments and may require the prior adoption of ad hoc legislation and/or regulation.31 Their key feature is the mutual engagement of financial institutions and supervisory authorities in experiments which allow for the development of innovative business models which can be tested in a controlled environment which takes into account both consumer and data protection issues.32 The proactive and collaborative quality of the relationship between the regulated entities and the regulators helps the former to understand and comply with

  • 28 See the Joint Committee of the ESAs ‘Joint Report on FinTech: Regulatory Sandboxes and Innovation Hubs’ JC 2018 74 (7 January 2019), whereby regulatory sandboxes are defined as schemes to enable firms to test, pursuant to a specific testing plan agreed and monitored by a dedicated function of the competent authority, innovative financial products, financial services or business models while innovation hubs establish a dedicated point of contact for firms to raise enquiries with competent authorities on FinTech-related issues and to seek non-binding guidance on regulatory and supervisory expectations, including licensing requirements.
  • 29 This is done by providing firms with a contact point for asking questions and initiating dialogue with competent authorities regarding the application of regulatory and supervisory requirements to innovative business models, financial products, services and delivery mechanisms: see the Bank of Italy FinTech Channel or the Project Innovate put in place by the Financial Conduct Authority in the UK.
  • 30 The first and most sophisticated sandbox system is that provided for in the UK since 2016 by the FCA; the USA have a patchy and fragmented picture, since each state has its own regime. The need for a uniform legislation and a federal regulatory sandbox was advocated by Michael M Piri, ‘The Changing Landscapes of Fintech and Regtech: Why the United States Should Create a Federal Regulatory Sandbox’ (2019) 2 Business and Financial L Rev 233. ROFIEG (n 5), in Recommendation No 14, has advocated the establishment of an EU-level ‘regulatory sandbox’, taking account of the experience acquired in the context of European Forum for Innovation Facilitators.
  • 31 In Italy a recent statute has provided that a ministerial regulation will set out the requirements for regulatory sandboxes: Article 36, ss 2-bis ff, of 1 no 58/2019, delegates the Minister of Economy and Finance, after consulting with the Bank of Italy, Consob and IVASS, to adopt a regulation establishing the requirements of regulatory sandboxes in the FinTech sector (the regulation requires currently still approval). The same provision establishes the FinTech Committee, composed of the Ministers of Economy and Finance, Economic development, European Affairs, Bank of Italy, Consob, IVASS, the Competition Authority (AGCM), the Data Protection Authority, the Digital Italy Authority and the Revenue Agency. A similar provision is due to be introduced in Spain through the Draft Law on Measures for the Digital Transformation of the Financial System, currently under approval.
  • 32 Though providing for a more adaptive environment, sandboxes cannot be used to circumvent the application of existing EU and national legislative requirements, nor can they allow regulators to lower the threshold for authorisations and licences.

regulatory requirements and the latter to gain expertise and learn how to focus regulation on the right issues, so as not to hinder the progress of financial innovation and to prevent regulation from becoming a barrier to the entry of new players. One idea behind this is that an adaptive, principles-based regulation[1] could precede the adoption of rules-based regulation, in an environment of structured experimentalism. This approach, in turn, could influence how supervision works in the future. A uniform approach at EU level, through the adoption of a common sandbox model, may prevent regulatory arbitrage and promote a level playing field among operators.’

  • [1] Which, however, does not come without risks, as argued by Hilary J Allen, ‘Regulatory Sandboxes’ (2019) 87 Geo Wash L Rev 579, 592, who suggests that principles-based regulation could precede the adoption of rules-based regulation, and that sandboxes should be characterised by rather strict eligibility criteria. On principles-based regulation Julia Black, Martin Hopper and Christa Band, ‘Making a Success of Principles-based Regulation* (2007) Land Fin Markets Rev 191. 2 Cental Karakas and Carla Stamegna, ‘Defining an EU Framework for Financial Technology (FinTech): Economic Perspectives and Regulatory Challenges’ (2018) 7 Law and Economics Yearly Rev 106, 124. 3 Sec ROFIEG (n 5), Recommendation No 14. 4 Joint Committee of the ESAs, ‘Joint Advice to the European Commission on the Need for Legislative Improvement Relating to ICT Risk Management Requirements in the EU Financial Sector’ JC 2019 26 (10 April 2019). 5 The Bank of Italy is using Twitter data as an indicator capable of capturing informational spillover effects across banks and measure the level of trust among depositors: see Matteo Accorncro and Mirko Moscatelli, ‘Listening to The Buzz: Social Media Sentiment and Retail Depositors’ Trust’, Bank of Italy Working Paper No 1165 (February 2018). 6 ECB, ‘Guide to Assessments of FinTech Credit Institution Licence Applications’ (2018). 7 According to the World Bank and CCAF, ‘Regulating Alternative Finance: Results from a Global Regulator Survey’ (2019), alternative finance refers to financial products that are developing outside the traditional regulated banking and capital market sectors via innovative and predominantly online channels, such as peer-to-peer lending, equity crowdfunding and initial coin offerings.
 
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