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Russian Electronic Money Association presents Analytical Report ‘Regulatory Sandboxes. Regulation as a Service’

Analytical Report ‘Regulatory Sandboxes. Regulation as a Service’

The increasing popularity of smartphones, emergence of mobile ecosystems and new effective ways of data processing set the stage for financial innovations. However, they do not fit in existing financial regulation well. That is why regulators are now challenged by the difficult task. They cannot constantly modify legislation in response to every innovation, because this will eventually lead to regulatory chaos. However, they also cannot ignore new technologies, since lack of decision-making may have a negative impact on financial stability and consumer protection.

In this Report we look at perhaps the most promising solution of this problem - regulatory sandboxes. Regulatory sandbox is a special set of rules, which allow innovative companies to test their products and services in a safe limited environment without violating financial regulation.

We have had a closer look at regulatory sandboxes and similar projects that are either live or currently under discussion in Great Britain, Singapore, Australia and The United Arab Emirates (Abu Dhabi Global Market).

Main Findings of the Analytical Report are:

1. Regulatory sandboxes are always initiated by the regulator, therefore private sector involvement in their management is limited. In the UK market players were offered to create their own regulatory sandboxes in addition to the public one. In Australia industry organizations are given the role of a gatekeeper for the local sandbox.

2. Generally, both start-ups (or unlicensed business) and incumbents can test their products in regulatory sandboxes. Testing of products and services in limited environment is usually available to both types of companies.

3. In most cases, rather than create a universal sandbox, regulators establish separate unique sandboxes for each particular project. Normally, terms of product testing are discussed with applicants on a case-by-case basis.

4. Regulators have to screen sandbox applicants, as some businesses may try abusing the opportunity, i.e. evaluate commercial potential instead of dealing with the legal uncertainty. Hence an applicant should prove the need to test the innovation on real customers and in a sandbox, while also demonstrating that innovation is unique and ground-breaking.

5. There is no single approach to regulatory sandbox testing parameters. The restrictions may include: limits on number of clients, limits on risk exposure, requiring informed consent and other.

6. Regulatory sandboxes benefits are different as well. In some cases, participants are exempted from all the regulatory requirements. However, more common are limited legal relaxations: when regulator allows sandbox companies not to follow obsolete or obviously irrelevant rules. In some cases, existing rules can be modified.

7. On average, a testing period in the regulatory sandbox lasts for 6-12 months. In some cases, it is up to two years (in UAE). When the testing is over, companies either deploy their product on the market, complying with the usual licensing obligations, or discard the solution. Participants inform the regulator about their progress throughout the testing period.

8. Broadly, all these complex features make regulatory sandboxes more of a regulatory service, rather than a separate project. They are not only about exemptions from some legal requirements, but also about counseling, information sharing and support. In fact, regulators become consultants for innovative companies. This helps them understand new trends in the market better, and, as a result, implement more effective legislation.

In the first part of the Report, we review the concept of fintech and its significance. Then we discuss the idea of regulatory sandbox, and some examples of local implementation. The appendix provides aggregated information on regulatory sandboxes and includes some relevant documents.

The information provided in this Report is correct as of September 1, 2016.

The Report is available here.