“To help capture the greatest benefit from continuing waves of innovation, we must help build trust in new technologies — by promoting an atmosphere that encourages creativity, without sacrificing consumer protection or systemic safety. If regulators devise frameworks that strengthen public trust, they can inspire entrepreneurship and unleash the full creative energies of technology innovators.”
Tobias AdrianIMF Financial Counsellor and Director of the Monetary and Capital Markets Department
“We are a long-time supporter of an EU-wide framework of experimentation, also know as a fintech sandbox. This will not only benefit the market knowledge of authorities but eventually accelerate the cross-border nature of fintech business cases.”
Wim MijsCEO European Banking Federation
“Regulators are acutely aware of the need to be proportionate. We need to monitor and act on risks as they emerge, but we need to balance this against the need to allow the development of technologies that can provide real benefits for society.”
Svein AndresenSecretary General, Financial Stability Board
Banks are seeking to test out new technologies, solutions and business models but are constrained by the existing regulatory framework which does not allow low-risk and low-scale experimentation to take place under less stringent rules. This issue limits competition and may stifle innovation in financial services.
Consumers, in turn, are hindered from enjoying certain improved value proposition from their trusted banks.
Regulators could help by exploring how to gear up to support innovation across its activities, working with industry and wider stakeholders. A risk-based approach to regulation should be consistent throughout the innovation lifecycle, providing an appropriate, flexible and simplified regulatory framework. A first step in this journey is to consider the creation of an EU framework for experimentation.
Experiences of frameworks for experimentations around the world
The UK was the first country to set up a framework for experimentation, in May 2016, as part of Project Innovate, an initiative promoted by the Financial Conduct Authority to help encourage innovation in the interest of consumers, and to promote competition among financial services providers by supporting disruptive innovation.
Shortly after the UK, Australia pursued its own initiative by setting up a framework for experimentation as a natural extension of the ASIC (Australian Securities and Investments Commission) Innovation Hub. A key feature of the proposal is reducing, during a fixed period of time, some of the requirements (such as financial resource requirements, or relevant managerial experience) which might be challenging for and impede start-ups.
There are significant differences between the UK and Australian models on which framework for experimentation rely, the most important one being about ease to enter the framework.
The UK model rests on entry subject to approval through an application process that takes place twice a year. The FCA bases its approval process on several factors including the ingenuity of the innovation, benefit to consumers, readiness of the product to be tested, and need of guidance for the testing process.
At the other end of the spectrum, the Australian framework for experimentation does not rely on the regulator selecting applicants and negotiating individual testing terms. On the contrary, it rests on a “white-list” approach whereby all companies that fit certain criteria are automatically allowed to validate their concepts without having a license.
Companies in the framework for experimentation are, however, required to let it clear to customers that they are not authorized/licensed and are operating under temporary licensing exemption.
Many financial centers have followed the lead open by the UK and Australian initiatives, among them Singapore, Indonesia, Malaysia, Thailand, or Hong Kong in Asia; while in Europe initiatives have been launched in Switzerland, the Netherlands, Lithuania.
Frameworks for experimentation in selected the world
The EBF is convinced that an EU wide regulatory framework of experimentation would be the best solution to increasing the level of innovation happening in the EU while also bolstering the EU’s competitiveness with other leading markets. The main benefit of such an approach is that new technologies, business models and the regulatory learnings that result from encountering innovation could reach across all EU member states more efficiently than following a more fragmented approach and, obviously, it would have great value as a testing ground for cross border projects.
Currently we observe that supervisory authorities have a diverging approach on this issue, as the desire to attract innovative companies to their countries drives regulators to make their approach to Fintech more favorable. In our opinion, the collaboration among EU and national authorities and coordination across European supervisors shall be considered with a view in the long term to achieving a UE regulatory framework for experimentation open to all innovators.
The EBF is the voice of the European banking sector, bringing together national banking associations from 45 countries. The EBF is committed to a thriving European economy that is underpinned by a stable, secure and inclusive financial ecosystem, and to a flourishing society where financing is available to fund the dreams of citizens, businesses and innovators everywhere.
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