New EU report on regulatory sandboxes and innovation hubs sets out best practice and promotes cross-border collaboration
As part of the Commission’s Fintech Action Plan, the European Supervisory Authorities have released a joint report on regulatory sandboxes and innovation hubs – collectively “innovation facilitators”. The ESAs' report sets out a comparative analysis of innovation facilitators within the EU, best practices for developing and operating innovation facilitators and options to promote coordination and cooperation between innovation facilitators to support the scale-up of fintech across the EU.
What are innovation facilitators?
Innovation hubs and regulatory sandboxes are two distinct categories of initiatives adopted by national authorities to facilitate innovation:
- Innovation hubs provide a dedicated point of contact for firms to raise enquiries and seek non-binding regulatory guidance on fintech-related issues.
- Sandboxes provide a framework in which to test innovative financial products, financial services or business models for regulatory compliance.
Importantly, neither can disapply or modify any requirements of EU law. Most Member States have set up innovation hubs, whilst only five (including the UK) have established sandboxes.
Comparative analysis and best practice principles
The ESAs ran a comparative analysis on innovation facilitators already established in the EU, identified the perceived opportunities and challenges they pose and used its findings to inform a set of best practice principles.
These principles (which are set out in Annex B of the report) are intended to provide indicative support for competent authorities establishing, or reviewing the operation of, innovation facilitators.
Challenges posed by divergent Member State approaches
Some of the key challenges the report identifies arise from Member States taking differing approaches to designing and operating innovation facilitators.
The report notes that some competent authorities raised concerns that different approaches could affect the relative attractiveness of jurisdictions as centres for financial innovation and create the risk of regulatory arbitrage.
Another issue raised was that, at present, firms who have successfully tested innovations in one Member State may need to start from scratch in getting their innovations approved in another Member State, even where equivalent legal requirements apply. Addressing this issue could facilitate the growth of fintech across the EU as a whole.
Options to promote cross-border collaboration
The report suggests two (non-exclusive) options to promote cross-border collaboration between innovation facilitators:
- ESA guidance: the development of joint ESA guidance on cooperation and coordination between innovation facilitators.
- EU network of innovation facilitators: the creation of an EU network to bridge innovation facilitators across Member States.
The guidance would provide a common approach that could be adopted by competent authorities to support coordination and cooperation. The network, which may complement the guidance, could provide a platform through which Member States can jointly seek expert advice and agree common approaches to firm-specific questions which are elevated to it. Additionally, it could serve as a forum to enhance technical capacity and knowledge-sharing.
The report acknowledges that these efforts may need to be supplemented by additional measures. In particular, it notes that many reported impediments to scaling arise from varying local regulatory requirements – e.g. as a result of differing definitions of financial instrument/ financial services in national legislation derived from EU law and differing conduct of business requirements. These differences may make it difficult to adopt common approaches to regulatory questions.
Global Financial Innovation Network
The EU is not alone in trying to foster cross-border collaboration on innovation. Last August, the UK’s Financial Conduct Authority together with 11 other financial regulators (all outside Europe) announced the creation of a Global Financial Innovation Network.
This was designed to provide a more efficient way for innovative firms to interact with regulators and help them navigate between countries as they look to scale new ideas. It is also intended to operate as a framework for regulators to cooperate and share different experiences and approaches. Of course, the jurisdictions involved in this initiative do not benefit from the type of common legal framework the EU has.
Other key challenges and guidance
Aside from cross-border issues, the ESA report identified various other challenges faced by competent authorities and provided some guidance to address these issues (which is reflected in the best practice principles). For example:
- To address concerns that firms could potentially mistake indicative guidance provided in innovation hubs as being binding or final, the ESAs emphasised the need for clear articulation of the nature of the guidance.
- To address concerns that propositions being tested in regulatory sandboxes may be perceived by consumers as being endorsed by the competent authority, the ESAs highlighted the importance of using clear language to clarify that this is not the case and having in place measures to mitigate appropriately any potential risks from the tests.
- To address perceptions that firms participating in innovation facilitators are perceived as having preferential treatment, the ESAs emphasised the benefits of publicly articulating general policy stances adopted through these platforms, to ensure that all firms can benefit from emerging regulatory and supervisory expectations.
What happens next?
Going forward, competent authorities establishing or reviewing existing innovation facilitators will be encouraged to take account of the ESAs’ best practice principles.
The ESAs plan to explore the options for enhancing cross-border coordination and cooperation between national innovation facilitators and define further steps in 2019. We will keep you posted.