Global FinTech sandbox: under construction

November 2018 | FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

November 2018 Issue

Expanding on its proposal earlier this year to create a ‘global FinTech sandbox’ to assist regulators and innovators to constructively interact, the UK’s Financial Conduct Authority (FCA) has unveiled the result of its overture: the Global Financial Innovation Network (GFIN).

Produced in collaboration with 11 financial regulators and related organisations, the GFIN, while adhering to the principles set out in the FCA’s UK-focused regulatory sandbox of 2015, rolls them out across a much broader canvas.

“The GFIN is an important next step for organisations that are actively engaged in understanding and harnessing the benefits of innovation in financial services for consumers, while managing the potential harm,” says Christopher Woolard, executive director of strategy and competition at the FCA. “It can help share experiences and knowledge from across different markets, while also providing a platform for innovative firms wishing to scale their propositions via testing in multiple countries.”

In the view of Chris Ward, principal consultant at Mapa Research, markets have responded positively to the FCA’s redefined approach to FinTech – typified by the regulatory sandbox, a concept replicated by the GFIN. “Regulators are generally becoming attuned to the need to change their approach to FinTech, the most notable being the US Treasury Department. The GFIN’s mission is still being defined, but broadly its purpose is twofold: as a network for regulators to share learnings and to help FinTechs engage in cross-board activities – something that could be crucial to UK FinTechs post-Brexit.”

Advantages, disadvantages and priorities

As with any far-reaching initiative, weighing up advantages and disadvantages is key, as is establishing priorities. The GFIN is certainly advantageous in that it helps nascent FinTech companies soft launch their products in significant jurisdictions, offers equal treatment by regulator members and reduces market costs.

That said, Jonathan Lawrence, a partner at K&L Gates, recognises that a homogenisation of regulatory frameworks may stifle innovative thinking regarding regulation, as well as shut out new jurisdictions which may wish to develop their own regulatory frameworks in order to attract FinTech start-ups. In terms of priorities, Mr Lawrence believes the GFIN should “allow regulators to innovate in their own jurisdiction, in order for best practice to be spread among the other members, share innovation in regulation and maintain overall regulatory standards to prevent contagion from any FinTech business failures”.

“The general consensus seems to be that the potential advantages of the GFIN cancel out its perceived disadvantages.”

For Mr Ward , the GFIN’s priority should be to assist firms to develop, test and deliver cross-border financial services in an efficient way. “The main advantage of a global sandbox is that it gives a single gateway to information and support, which means firms do not need to engage individual regulatory bodies in each market they want to work in,” he says. “However, while the sandbox can be great for the firms that are in it – its main shortcoming will be its capacity. If a sandbox exists, will delivering a cross-board solution be more difficult for those on the outside?”

However, the general consensus seems to be that the potential advantages of the GFIN cancel out its perceived disadvantages. “The positives outweigh the challenges,” agrees Sameer Gulati, head of policy and regulation at Innovate Finance. “Pursuing a framework for regulatory collaboration and interoperability, while encouraging useful experimentation cross-jurisdictionally will likely yield positive outcomes for users of financial technology products.”

A new era of co-operation

Having been out for consultation until 14 October, it is too early to fully determine an across-the-board response to the GFIN. That said, there is confidence that the outcome will ultimately result in a new era of cooperation between FinTech firms and regulators.

“I expect the response to be positive – the intent is great – but there will be questions about execution,” suggests Mr Ward. “Taking a sceptical view, we need to ask how a national initiative can be scaled to a global service. Many people will be keen to hear how the GIFN will function practically – how will participating firms actually test their products? Whatever the response to this consultation, FinTechs, financial institutions and regulators around the world are increasingly aware that to keep pace with technology and consumer needs they must work closely together, at a national level and globally.”

While Mr Gulati also believes the response to the GFIN will be upbeat and optimistic, for him, the big question is whether platforms such as the GFIN are able to practically cater for a new cadre of financial firms, whose reliance on technology obfuscates borders and requires regulators to adjust their horizon on what responsible innovation looks like.

“In terms of preparing for a new era of cooperation, cross-functional financial fora have existed for much of the last 50 years,” says Mr Gulati. “However, if the GFIN can assist FinTech firms with ambitions to scale abroad, reduce informational barriers to understanding financial regulation and be a forum for constructive dialogue around standard-setting and policy-making, this would be a welcome addition and will be supported by the FinTech industry”.

Fraser Tennant