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QUESTIONS FOR ROUNDTABLE PARTICIPANTS
These are the questions addressed to the roundtable participants:
Objectives: What is the added value of a regulatory sandbox?
Regulatory sandboxes provide an environment of reduced regulatory constraints on innovative financial products and services. They enable financial services innovators - both incumbents and startups - to test new products and services in a "safe area", providing greater flexibility or even exemptions from existing regulation.
Sandboxes can be highly valuable to financial services institutions in several important ways:
- They reduce the time and cost of getting innovation to market with competitive advantages for the innovators that enter in the sandbox;
- They provide innovators with greater access to finance by reducing risks of client adoption and increasing returns on capital investment;
- They enable innovators to work with regulators to ensure new development of technologies and business models aligns with regulations. Thanks to this cooperation, firms can understand the regulator’s expectation and the competent authority can understand the opportunity and the risk incurred by the innovation firms;
- Reduce regulatory uncertainty thanks cooperation between regulators and FinTech firms that participate to the regulatory sandbox. It can be also useful in case of cross-border cooperation;
- Risk mitigation for innovators and consequently customer’s protections: innovators can test the innovation product in a safe and controlled environment with the supervision of regulator; if the product has some concerns, during the sandbox period, appropriate adjustment can be done before the product is launched.
Scope: How should eligibility be determined? Is there a need to distinguish between incumbents, new entrants and technology providers?
By our point of view the eligibility criteria should be determined according to the following criteria:
- typology of innovation: it should be coherent with the purpose of sandbox and take advantages from the technology tools that the supervisors of regulatory sandbox provide;
- genuine innovation: the service should offer no comparable services or products that are already established on the market;
- delimitation of the market: the offered service should refer to the specific market with specific regulation (e.g. UK or other country);
- consumers benefits: the innovation should offer a good prospect of identifiable benefit to consumers;
- ready to test: immediate availability to start the tests;
- purpose of participation: the deliverables expected at the end of sandbox period should be suitable for the market and ready to be used by target consumers;
- transaction strategy from sandbox to real market: defining the launch strategy and the possible roll-back solution in case of failure;
- risk disclosure and mitigation actions: disclosure of risks to consumers and also to businesses and possible mitigation actions if necessary.
By our point of view, the above criteria should apply to those who apply for participation in the sandbox without distinction between incumbents, new entrants and technology providers.
Admission and testing: How can risks be mitigated? Are testing parameters helpful? (e.g. limits on geographic locations and number of consumers, time limit for the test)?
The regulatory sandbox limits (e.g. Limits on geographic location, number of consumers, time limit for the test, limit on the amount of transactions in case of financial services, and so on) are necessary to mitigate the risks. When a sandbox operates in the production environment, it must have a well-defined space and duration for the proposed financial service to be launched, within which the consequences of failure can be contained.
The appropriate boundary conditions should be clearly defined by regulators so to allow sufficient protection of the interests of consumers and to maintain the safety and soundness of the industry. That’s why, the regulators should choose carefully the entry criteria when create the sandbox, predetermining the following items:
- Start and end date of the sandbox;
- Target customer type;
- Limit on the number of customers involved;
- Other quantifiable limits such as transaction thresholds or cash holding limits;
- Typology of risk that can be accepted into the sandbox;
- Obligations to ask to participants according to the level of risk level contributed by the participant;
- Prudential requirements to ask to participant, as statutory/liquidity requirements, minimum paid-up capital, capital adequacy, license fees, Technology risk management, Management experience.
Evaluation and exit: Should outcome be shared with other component authorities? Should outcomes be made public?
In order to share the outcome, a final report with the “lesson learned” can explain how the firms that have participated to the sandbox have met its objectives and how the regulators acted and intervened when necessary.
By our point of view, the outcomes of the regulatory sandbox should be published detailing the executed tests and the final result they have obtained. Adding to this, it can be considered very useful for the other FinTech environment actors to be aware about the main critical issues and the challenges that the sandbox participants faced in testing their innovation and the implemented actions / solutions that allow successfully pass the tests. This can speed-up the Fintech development and contribute for promoting competition in the market. Obviously, it is also necessary to take into consideration the needed to protect commercially sensitive information avoiding to compromise the competitive advantage of each participant.
In order to strike a good balance between the objective of protecting commercially sensitive information, and the benefits of sharing the outcomes of sandbox tests, we suggest the following precautions:
- The regulatory sandbox should ensure the Intellectual Property (IP) protection and the other sensitive information for each company that participate to the testing through multilateral NDA agreements between regulators and participants and also between participants and participants. The transparency should be ensured firstly between regulators and each company. The agreements can contain the indication of limits of disclosure that each participants accept;
- Another possibility is to allow to the participant to decide with whom to share specific results and with whom not. In fact, a company can prefer to create synergies with a specific companies from its own sector rather than with the entire panel of participants or with the rest of market;
- The results of testing and all the other outcomes not necessary should contain the sensitive information that represents the competitive advantage for the company.
Coordination: Do issues arise that go beyond the scope of component authorities and require coordination with other authorities (e.g. data protection)?
Issues that go beyond the scope of component authorities and require coordination with other authorities are very probable if the regulatory sandbox perimeter is not well pre-defined. That’s why the entry criteria such typology of innovation is very useful. A possible solution could be to reinforce the specificity of the regulatory sandboxes so as to minimize the risk of leaving the regulatory framework envisaged. A big effort should be done in the preparation phase. At the same time, greater coordination between regulators should be ensured in order to involve other authority when necessary.
Roll-out across the EU: What can be done to facilitate scaling-up across the EU? Simultaneous testing in more than one Member State? Transferability of outcome to the other Member State?
In order to facilitate the EU cross-border development of the innovative technologies, among the regulatory sandbox could be useful planning several macro scenarios, for each innovative technology, and perturb specific key economic and/or compliance variable simultaneously. The results must be collected in a standard templates and then supervisors will evaluate the overall impact of homogeneous technologies on its regulatory and economic framework.