On February 14, 2018, the United Kingdom Financial Conduct Authority (FCA) published a proposal for a global regulatory sandbox. The goal of a regulatory sandbox is to encourage innovation by allowing carefully-selected firms to test their concepts on a controlled subset of consumers without triggering full regulatory requirements at the outset. This can be particularly useful to Fintech start-ups that often face a complex regulatory structure.
The concept of a regulatory sandbox has been popular to date in the UK. Since the FCA launched the first regulatory sandbox in 2016, more than 60 firms have tested their innovations. Over 40% of the first cohort of sandbox firms received investment funding during or following sandbox testing. Other countries, including Canada (with respect to securities regulation) Australia, Hong Kong, Singapore and the Netherlands have also created their own sandboxes.
Currently, the FCA has nine different bilateral Fintech cooperation agreements with regulators in other jurisdictions (including an agreement with the Ontario Securities Commission). A global sandbox could be a useful one stop shop and more efficient way for Fintechs to scale globally.
Designing a Global Sandbox
A global sandbox would be a much larger regulatory “safe-space” in which Fintechs could test their ideas in multiple jurisdictions. Participating jurisdictions would have to agree upon a common protocol for firms wanting to enter the sandbox, as well as common supports for start-ups with global ambitions.
The proposed global sandbox would be focused on cross-jurisdictional issues, such as Anti-Money Laundering (AML)/ Know Your Customer (KYC) requirements. Testing in a global sandbox could involve two or more jurisdictions at the same time, meaning that multiple regulators would be giving their feedback. A global sandbox could bring together the diverse perspectives of multiple regulators together on cross-border issues and allow for common reporting and policy coordination.
The concept of a global sandbox could benefit entities wishing to participate in such sandbox in a number of manners. First, it could provide those entities with access to a larger customer base, a concept especially attractive for businesses based in smaller markets such as Canada. This would allow such businesses to more quickly achieve economies of scale and network effects. Second, as a related point, certain Fintech business models can be very data-intensive (such as businesses focused on credit analysis or fraud analysis). Generating significant amounts of data with a customer base in one country can be challenging, and a global sandbox could provide the opportunity to create and leverage larger (and therefore more helpful) data sets. Third, entities may spend significant resources undergoing the application process to participate in a sandbox in any single jurisdiction, and would therefore benefit from a more efficient coordinated process across jurisdictions.
A global sandbox could also potentially help Fintechs test their concepts in jurisdictions where sandboxes have not progressed as quickly as the UK, such as continental Europe (potentially limiting the impact of Brexit on the UK Fintech market) and the United States. A global sandbox could also provide benefit to countries who choose to participate, as they would gain access to best practices learned from the UK’s sandbox experience.
Implications for Canada
A global Fintech regulatory sandbox would likely be attractive to Canadian Fintechs seeking to expand globally. The UK has been a market of interest for a Canadian Fintechs. Several Canadian Fintechs have been part of trade missions to the UK and, as noted above, the FCA and the Ontario Securities Commission (OSC) previously entered into a Fintech cooperation agreement. A global sandbox could make cooperation with the UK even easier.
However, a global sandbox remains a challenging proposition. Coordinating regulatory policy between different jurisdictions with different interests and regulatory cultures can be very difficult. For this reason, the FCA has acknowledged that “a full multilateral sandbox, which allows concurrent testing and launch across multiple jurisdictions, is an ambitious goal”. While ambitious, the concept is nonetheless an attractive one for many stakeholders.