Monday, 17 september 2018 | Redacción CEU
Law suffers from bad reflexes. It reacts slowly when it comes to responding to the changes that occur in the environment which surrounds it. In an era which is marked by innovation, the digitalization of processes and the change as a constant, the priority goal is reducing these times as much as possible. Companies, especially digital firms, need to standardize and regularize their new business models in order to grow. They cannot achieve this, at least to the extent they desire, if their growth is not accompanied by appropriate legislative development. The mismatch between rules and innovation does not benefit anyone in the long term. This is the context that has paved the way for the arrival of a new proposal: fields for testing new financial alternatives. How do sandboxes boost financial innovation? Why are they so interesting for fintech firms?
As the name suggests sandboxes are safe spaces for playing. They are places where children can experiment, discover skills and do things that they could hardly do outside, much less with parental consent. In the new financial environment, the sandbox simile is evident. The infants are the new firms known as fintech companies. Of course, they are not the only ones who can play in these sandboxes, well-established companies which have new business ideas can also join the game. Sandboxes are places which have been designed to promote financial innovation, controlled spaces where fintech firms and large modern companies can experiment with relative freedom, in other words, they are testing grounds.
The so-called regulatory sandboxes are spaces that generate a great interest within the fintech world. The adoption of these testing grounds in Spain would bring many advantages according to the Spanish Association of Fintech and Insurtech. In its report "Proposal for the implementation of a sandbox in Spain", which was published in March 2018 in collaboration with Hogan Lovells, they pointed out, among other reasons, the following ones:
The same report includes four key aspects for the implementation of a regulatory sandbox in our country: innovation development, promoting competition, constant legislative updating and risk minimization.
One of the main advantages sandboxes have for both fintech firms and those entities which want to offer new business ideas is that they enable us to verify the viability of projects in a safe environment and also encourage the development of a regulatory framework adapted to them. Normally, this type of financial projects must obtain an authorization to enter the market first. With the creation of a sandbox, they can be previously tested obtaining in faster and simpler ways to boost their activity as long as they comply with a protocol which is agreed on between promoters and supervisors.
These test fields can also strengthen the collaboration between traditional banks and fintech companies and users can benefit from this alliance. As for the regulatory bodies, the creation of a sandbox helps them to understand the sector better, provides them with useful information about what the possible risks users are exposed to are, and allows them to establish rules in accordance with reality.
However, it should be noted that the creation of a sandbox is not welcomed by all with the same enthusiasm. Among the main arguments against them, we can cite: the possible distortion of competition, the arbitrariness factor in relation to criteria or the privilege of some geographical areas over others.
In the United Kingdom, the so-called regulatory sandbox has been in force since 2016. Thanks to its implementation, the country has become a center for innovation in financial technology worldwide. With this country as a reference, there are many states that have started to work on the design of this type of testing spaces: Australia, the United States, Canada, Russia, Switzerland, India, Dubai, Switzerland and Spain.
Therefore, Spain is becoming a pioneer within the European Union. The current government decided to continue the previous draft bill that constitutes the precursor to the implementation of a Spanish sandbox. Nonetheless, AEFI and Hogan Lovells recently showed their concern for its details. According to what they say, the draft bill about the digital transformation of the financial system, which includes the regulation of the sandbox, does not have a direct allocation of resources for its effectiveness.
They have pointed it out so in the remarks section of the public consultation that they presented at the General Secretariat of the Treasury and Financial Policy. "Although the regulation is what was expected and is innovative and daring, the concern is caused because it could remain dead letter if it does not have the adequate means for its effective implementation", they said.
November may be the month when the law is finally approved. Soon, we will know more details about the horizon of the fintech sector and, in short, of the future of financial innovation.
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