In a recent report, the European Banking Federation (EBF) argued for a legal framework in which companies can test new technologies and business models. A so-called regulatory sandbox, such as that which already exists in the United Kingdom, enables innovation and disruption without causing adverse effects.

A testing ground of this kind is perfectly feasible in Belgium.

No one disputes the fact that we should encourage innovation, but governments always seem to struggle to strike the right balance between stimulating innovation and erring on the side of caution. Highly regulated sectors can therefore quickly become unfavourable to newcomers.

In other words, new technologies and innovative business models often do not fit into the existing legislative framework. Due to compliance costs and legal uncertainty, innovative companies also have disproportionately limited room to manoeuvre.

The result is that disruptive players are either scared away or operate in a grey legal framework.

In a previous blog post, we discussed the need of participants in the sharing economy for legal certainty. In the financial sector in the United Kingdom, a creative solution to this need, in the form of a testing ground, has already been implemented, the so-called regulatory sandbox.

The Financial Conduct Authority's testing ground

A regulatory sandbox is a secure environment created by a government or regulator in which companies can test innovative products, services and business models. Within the sandbox, start-ups can offer their services to consumers, without having to meet immediately all legal requirements.

The testing ground created by the Financial Conduct Authority (FCA) in the United Kingdom is the best-known example. It was launched in May 2016 to provide a boost to fintech companies. Under normal circumstances, such companies must comply with a wide range of prudential requirements, which can hinder their development and growth at the outset.

In the regulatory sandbox, the 24 participating companies can experiment as much as they like.

However, it should be noted that the sandbox does not fully exempt companies from their legal obligations. Otherwise, they would not be able to inspire consumer confidence. Moreover, they must be able to acquire a full licence after a certain period of time.

The obligations in the testing ground mainly focus on ensuring sufficient consumer protection and the development of activities under the watchful eye of the FCA.

No European strategy for sandboxes

The sandbox has not gone unnoticed by international organisations. In a recent report, the European Banking Federation (EBF) argued for an appropriate, flexible and simplified legal framework for such testing grounds, not only to stimulate innovation but also to encourage regulators to address innovation at an early stage, so that the appropriate changes can be made to the existing legal framework at a later date.

The European Financial Services Roundtable takes the same view. In their opinion, there is an urgent need for a European framework for regulatory sandboxes, given that European legislation, including the General Data Protection Regulation (GDPR), does not allow for derogations in a number of areas.

Moving beyond Fintechs

The interest of regulators appear to be limited, for the time being*, to the financial sector. The United Kingdom is a pioneer in this area, while other countries such as the Netherlands are at least examining the possibility of implementing a testing ground, even though no concrete actions have been taken thus far.

Unfortunately, Belgium still lags behind. One reason for this may be that many of our laws are designed to protect consumers and society as a whole, so it is not considered desirable to ease regulation simply in order to encourage innovation. On the other hand, nor is it desirable to wait until new technologies and innovative business models impose themselves on the market and regulators to such an extent that legislative activity can no longer be postponed.

By establishing a testing ground, regulators can strike a balance between protection and oversight, on the one hand, and innovation and dialogue, on the other. At the very least, when a company leaves the testing ground, with the help of the government or regulator, it will comply with the applicable legislation. In the best case scenario, however, dialogue between the two sides will result in the legislative framework being adapted to suit the new status quo.

Testing grounds appear to be the perfect way to stimulate innovation in regulated sectors. Thanks to this development, the Ubers, Airbnbs and other fintech start-ups of the future will have less regulatory headwinds to contend with, while the market and consumers will not be exposed to unnecessary risks.