What are regulators in your jurisdiction doing to encourage innovation in the financial sector? Are there any initiatives such as sandboxes, or special regulatory conditions for fintechs?
Fintech (2nd edition)
The supervision of the financial sector is shared by the National Bank of Belgium and the Financial Markets and Services Authority (twin-peaks model). Both these regulators have created a common dedicated ‘Contact Point for FinTech’. Fintechs are welcome to contact the regulators through this medium and they will answer their queries within three business days. This should be seen as a so-called “sound box” rather than an actual “sand box”.
Generally, both the NBB and the FSMA are open to innovation in the financial sector and certain dedicated operational teams have been reinforced with tech-savvy profiles.
Regulators also accept to organise informal intake meetings with fintechs to discuss their project. Licence applications, meetings and contacts can be held in French, Dutch, or English, which greatly facilitates the dialogue with foreign entrepreneurs and fintechs
The Bermuda regulators have provided a robust legislative framework for fintech companies to use as a solid foundation to develop their products and services. Such regulatory framework has provided comfort to potential and actual fintech clients by implementing much needed certainty in a developing industry. Bermuda has repeatedly demonstrated its commitment to encouraging innovation in the financial sector through various initiates, including, but not limited to, the following:
- This year marked the first ever Bermuda Tech Week hosted by the Bermuda Government and Bermuda Business Development Agency that encompassed a week of conferences showcasing fintech industry players, both local and abroad, and securing Bermuda’s position as an international leader in the fintech sector.
- On 16 October 2019, the Government of Bermuda announced that it intends to start accepting for payment of government taxes, fees and services, 1:1 US dollar backed stablecoins that get licensed by the Bermuda Monetary Authority.
- The Bermuda Government, through experts in the fintech industry, are offering free online or in-person training for those interested in blockchain, fintech and anti-money laundering regulatory compliance.
- The Government has worked on encouraging banks and financial institutions to provide banking services to Bermuda-based licensed companies, subject to their own internal policies, including a particular well-known full service commercial bank and provider of blockchain-based platform management.
- The Bermuda Monetary Authority has proposed establishing an insurance regulatory sandbox dubbed the ‘insurtech sandbox’ (Sandbox). The Sandbox is a space where companies can test new technologies and offer innovative products, services and delivery mechanisms to a limited number of customers in a controlled environment and for a limited period of time.See Question 18 for further information on insurtech initiatives in Bermuda.
- The Government has introduced a specific fintech work permit policy to support immigration of key personnel in this business sector – see Question 11.
In Brazil, as with most countries, regulation of fintech companies is still an evolving matter. The Central Bank of Brazil and the Brazilian Securities Commission (CVM), which regulates several aspects of the financial and securities markets, have been showing a modern and collaborative approach towards the innovation in the financial sector.
As an example of the collaborative approach, CVM has introduced on August 28, 2019, a regulatory sandbox whereby the regulatory entity opens a discussion opportunity among the players involved in innovative solutions in the financial sector to hear from them what are the main regulation challenges and how should the regulatory entity approach this disruptive situation.
The new rulemaking process, so called regulatory sandbox, allows the creation of an experimental regulatory environment where temporary regulatory instruments may be issued to empirically assess the benefits and most suitable procedures to implement a recommended solution.
With this novelty, the regulator will have means to test, individually and for a limited period, regulatory changes that, due to their features and according to the CVM Board, justify a trial environment, avoiding additional risks to the national financial system or to investors’ protection. Same approaches have been adopted by other regulatory bodies such as the Insurance Regulator (SUSEP) and Central Bank.
Chilean regulation on personal data protection (Law N° 19.628 regarding private life protection) which regulates the transmission, treatment, and storage of personal data, does not have a serious impact on the provision of financial services. Although this law regulates the processing of personal data, it is deficient at granting adequate protection to personal data, does not conform to the OECD standards, and is decidedly less strict than the European General Data Protection Regulation (GDPR)
For this reason there is currently a bill submitted to the Chilean Congress that seeks to extend privacy protections. The proposed bill proffers to create an agency or assign to an existing agency the task of oversight and inspection while also facilitating the beneficial and innovative uses of the data in evolving business and technological environments.
A number of U.S. financial regulators, across federal and state agencies, have launched innovation incentive programs and proposals. From the Office of the Comptroller of the Currency (OCC) to the Commodity Futures Trading Commission (CFTC); from the Securities and Exchange Commission (SEC) to the Conference of State Bank Supervisors’ (CSBS) Vision 2020, many agencies are seeking to promote responsible and prudent innovation in financial services. For example, the U.S. CFTC has introduced LabCFTC to promote “responsible innovation and fair competition for the benefit of the American public.” In addition, in June 2019, the CFTC announced the launch of LabCFTC Accelerator, which is focused on “deploying a variety of tools, including internal pilots and tests, market research, and innovation competitions in order to drive better understanding and potential adoption of emerging technologies.” The SEC also launched an innovation effort in 2018: its Strategic Hub for Innovation and Financial Technology (FinHub) serves as a resource to the public through which the SEC engages on fintech issues and acts as a liaison between SEC divisions and other regulators regarding emerging technologies.
In addition, several States (e.g., Arizona) are introducing regulatory sandboxes to enable innovators to experiment with new products or services in a controlled fashion with some flexibility. Under these regulatory sandboxes, the companies may be exempt from certain aspects of existing regulation.
Chinese regulators generally encourage innovation in the financial sector. Take blockchain as an example: it was identified as one of the core aims in the PRC government’s 13th Five-Year Plan in 2016, and since then, 12 authorities (including the Ministry of Commerce) have published guiding opinions on the promotion and development of blockchain for use in commodity trading markets.
In addition, with the growth of mobile payments and online banking, the PBOC has developed a new consumer credit rating system that monitors an individual’s wealth and debt, including household borrowing and utility bills, to give banks or third parties a more comprehensive picture of the individual’s financial position and their credit risk so that systemic risks can be better controlled. Furthermore, Alipay and WeChat Pay also launched their own credit-scoring system within their respective mobile apps so that individuals with high scores can enjoy special privileges, such as cash loans, consumer credit and even deposit-free bicycle renting.
The use of regulatory sandboxes has been the subject of much discussion in China, and the Chinese central bank has revealed that it is currently working on a new development plan for China’s fintech sector, which will include ‘regulatory sandboxes’ for at least ten major provinces and municipalities (including Beijing, Shanghai and Shenzhen) for actively exploring the use of technological means to increase the efficiency of financial services. It is also worth noting that the regulatory sandbox of fintech will be launched in the Beijing FinTech and Professional Service Innovation Pilot Zone after the zone’s establishment. The 2019 annual ‘Two Sessions’ also sent strong signals of support for Chinese fintech development, as the representatives of the PBOC referred to trials of a regulatory sandbox mechanism for the fintech sector as an effective mechanism for accelerating the development of financial innovations and reducing compliance costs.
Against the backdrop of a tightening regulatory landscape in recent years (driven largely by the global financial crisis), UK regulators and policy makers have undertaken a variety of initiatives and projects to understand the implications of technology in financial services. As well as investing in projects through Innovate UK and research councils, the government has carried out a number of calls for information and launched its Digital Strategy – setting out the government’s ambition to make the UK attractive to attracting and growing digital businesses.
At the regulator level, the FCA has established the Innovation Hub and the Regulatory Sandbox to support innovation in the interests of consumers. Through the Regulatory Sandbox (now on its fifth cohort since the end of 2015), a wide range of firms are able to test innovative business models, delivery mechanisms, products and services in the real market, with real consumers in a controlled environment. Firms also have direct access to the FCA’s dedicated teams, providing a level of advice and support around the regulatory regime and onward authorisation if this is required. Similarly, the Bank of England has established a Fintech Hub to consider the policy implications of fintech. To date this has focused on testing proof of concepts to understand how new technologies are being adopted and why, as a means of informing the Bank’s approach to financial stability and supervising the market.
The government has a Fintech Sector Strategy, which brings together HM Treasury, the FCA and the Bank of England, with a view to developing an approach to emerging technology and innovation while maintaining the UK’s international reputation as a safe and transparent place to do business in financial services. It is taking an active role, alongside institutions such as Innovate Finance, in promoting the attractiveness of the UK as a destination for growing a fintech business; and is promoting growth amongst the start-up community through initiatives such as the establishment of the Tech Nation Fintech Delivery Panel and various related programmes.
Law 1955 of 2019 created a sandbox for accelerated licensing for fintech companies. Also, in December 2018 financial institutions were authorized to invest in fintech companies which has triggered M&A activity in the sector. SFC, financial supervisor, created a 3-tier program in 2017 in order to foster innovation in the financial sector which has already bore fruits in encouraging technology adoption and regulation flexibilization. The 3 tiers are (a) an innovation hub with the purpose of establishing an on-going conversation between SFC and innovators, (b) a regulatory sandbox for rules issued by the SFC and that only applies to licensed institutions that may or not partner with fintech companies, and (c) regtech developments.
There is a clear mandate across all sectors of government to support and encourage the growth of fintech in the region. The financial sector, particularly in Financial Free Zones, represents a significant industry where innovation is sought, principally through accelerator programs.
Pursuant to the Board of Directors’ resolution no. 28/R.M of 2018, the Securities and Commodities Authority of the UAE (the “SCA”) approved draft regulations setting out regulatory controls for the fintech sector in the form of a pilot regulatory environment (sandbox) to enhance and support the financial integrity of fintech companies. The regulations achieve this by relaxing the regulatory requirements or exempting testers from some of these requirements. This testing environment is designed for developers of fintech projects, whether emergent or existing companies or individual projects by entrepreneurs.
The governor of the UAECB has stated, in the UAECB’s annual report for 2018, that the UAECB is “currently in the process of developing a fintech strategy that aims to capitalise on the UAE fintech eco-system and to cohesively deploy balanced regulatory and development initiatives”. The UAECB’s annual report for 2018 also mentions plans to commence further work on other regulations relating to payments and fintech in 2019.
The DIFC launched an accelerator programme named the Fintech Hive to encourage cutting-edge fintech solutions for leading financial institutions. Pursuant to this programme, the DIFC established an innovation testing license which permits qualifying fintech firms to develop and test innovative concepts for a period of six to twelve months without being subject to all regulatory requirements that normally apply to regulated firms. If the outcomes detailed in the regulatory test plan are fulfilled and the participating firm can satisfy DFSA requirements, it may migrate to full authorisation. If such conditions are not met, the firm must cease to carry on activities in the DIFC requiring regulation.
The ADGM launched an accelerator programme named the Regulatory Laboratory (“RegLab”) to encourage cutting-edge fintech solutions for leading financial institutions. Pursuant to this programme, the ADGM established a special type of financial services permission (i.e. license) which permits qualifying fintech firms to develop and test innovative concepts for up to two years without being subject to all regulatory requirements that normally apply to regulated firms. If participating firms are capable of meeting ADGM requirements at the expiry of the license, they may be transferred to the regular authorisation and supervision review. If such firms cannot meet these requirements, they must cease to carry on activities in the ADGM requiring regulation.
In addition to launching an accelerator programme, the ADGM added legislation in the FSMR specifically addressing the emergence of new technologies, namely crypto assets.
The FSC has taken several initiatives to encourage the developments of fintechs.
The Financial Technology Development and Innovation Experiment Act ("Fintech Innovation Act") was promulgated on January 31, 2018 and took effect on April 30, 2018. The Fintech Innovation Act aims to establish a secured environment for innovations and experiments in financial technology while protecting financial consumers (the so-called sandbox). The regulatory sandbox allows approved applicants to be exempt from certain laws and regulations during a specific period and within certain scope, and henceforth fosters flexibility for innovative experiments. According to the FSC’s public announcement of August 8, 2019, the number of innovative experiments that have passed the review and have been approved by the FSC has reached 6.
The FSC established the first fintech village in Taiwan, “FinTech Space”, jointly with Taiwan Financial Service Roundtable ("TFSR"; the private wing of the FSC), with the aim of fostering developments in the local fintech ecosystem and accelerating innovation. FinTech Space provides programs such as “co-working space”, “entrepreneurship mentoring”, “digital sandbox”, and “global cooperation”. It was reported that 37 teams have been approved to enter into the space, including 6 international start-ups. On December 7 and 8, the forum, “FinTech Taipei 2018”, was held under the instruction of the FSC, in order to demonstrate Taiwan’s potential in the area of fintech developments. Many international speakers were invited to share their insights and experiences and interact with the local players.
To further liberalize the regulations of traditional banking, the FSC granted the license for of the so-called “Internet only” banks to three consortiums, one is led by Chunghwa Telecom, another is led by Line, and the other one is led by Rakuten. The three consortiums are preparing for launching their “Internet-only” banking services currently. Meanwhile, the FSC continues its efforts to encourage the use of e-payment tools in the Taiwan market.
The Danish Financial Supervisory Authority in conjunction with the Danish government has a vision to make it easier for fintechs to grow in Denmark. The Danish Financial Supervisory Authority is likewise working to minimise legal uncertainties regarding fintech, and provide additional guidelines to help fintechs.
Further, the Danish Financial Supervisory Authority has launched a fintech sandbox ‘FT Lab’, where selected companies can test their innovations in a secure environment. The purpose of the sandbox is to provide a basis for testing financial products, promoting the development of these and enabling the Danish Financial Supervisory Authority to better understand fintech and support the use of new technology.
At the moment, there are no special regulatory conditions applicable to fintech.
Already in 2016, Finma issued a guideline permitting video- and online identification for AML purposes in an account opening process. Finma furthermore adapted an existing circular to make it technology neutral by permitting asset managers to enter into digital asset management agreements (instead of agreements in writing). Finma also established a dedicated helpdesk for fintech questions.
In 2017, the ordinance to the BA was changed: Prior to that revision, banking license requirements were easily triggered, e.g. if a fintech company was deemed to be accepting funds from the public on a commercial basis or if a fintech company lent to borrowers in excess of 500 million Swiss francs (approx. USD500 million) while refinancing itself with more than five banks not associated with the fintech company. Fulfilling all prerequisites of a regular banking license however is unreasonably burdensome for the average fintech company: not only would it have to meet capital requirements of more than 20 million Swiss francs (approx. USD20 million), but it would also have to comply with high corporate governance and regulatory standards. The revision brought two changes:
First, the time-period during which a financial intermediary may hold funds from third parties on its own accounts for the purpose of settling client transactions without being deemed to have accepted funds has been extended from seven days (according to the current practice of Finma) to 60 days. Therefore, if the settlement occurs during this 60 days-period, no banking license needs to be obtained. Crowd-funding platforms may capitalize on this exemption in particular, since it allows to route the funds through the platform. Similar advantages result for payment service providers. However, currency traders are excluded from invoking aforementioned exemption.
Second, the rule whereby a banking license is required whenever (i) either funds of more than 20 investors are actually held or (ii) the enterprise publicly announces that it is willing to accept such funds (regardless of the actual number of investors) was amended. Holding client funds (of more than 20 investors and for a period longer than 60 days) does now no longer trigger banking licensing requirements (as it is not deemed to be acting "on a commercial basis") if (i) the funds do not exceed one million Swiss francs (approx. USD1 million), (ii) the funds are neither invested nor interest bearing (except in the cases outlined below), and (iii) the depositors have been informed in writing or otherwise in text form prior to making the deposits that the funds are not covered by the Swiss depositors protection regime and that the institution (here: the fintech firm) is not supervised by Finma. In case the person accepting such funds is primarily engaged in commercial/industrial (i.e. not financial) activities and uses the accepted funds to finance such activities, the requirement that the funds must neither be interest bearing nor invested does not apply. The new rule is unofficially termed "sandbox" and aims to give space for developing fintech solutions without their being subjected to (prudential) supervision by the Swiss regulator. In case that aforementioned threshold is being exceeded, the institution must notify Finma within 10 days and file an application for a (regular) banking license within 30 days. Finma may prohibit the institution from accepting additional funds from the public until a banking license is granted, should Finma consider this necessary taking into account market and customer protection.
In addition, in 2019 a change of the BA itself became effective: By this change, Switzerland introduced a “banking license light”. The amendment to BA was headed “promoting innovation” and set forth, among others, that an entity does not qualify as a bank (even if primarily engaged in the financial sector accepting funds from the public on a commercial basis or publicly offering such services) if such acceptance of funds is limited to the amount of 100 million Swiss francs (approx. USD100 million) and the assets are neither invested nor interest bearing. Instead, the BA applies mutatis mutandis to such entities, potentially going along with lower requirements as regards accounting standards, auditing and depositor protection. Hence, Switzerland has already taken a number of steps to establish a “banking license light” and a sandbox.
Finma as the financial markets regulator was the first supervisory authority to issue guidelines for initial coin offerings (or token generation events, commonly known as ICOs) (see question 14 below). These guidelines were recently amended by explanations on how Finma looks at security token offerings (STOs), and on the AML treatment of digital assets.
The Swiss government and industry have furthermore initiated the "digital Switzerland" initiative, bringing together a great number of interested parties to further the ecosystem and the regulatory framework for the digitalization of Switzerland. The already existing and more specialized fintech ecosystem, which by itself comprises a variety of associations, meetups and conferences such as the blockchain taskforce, will also profit from that initiative. In general, it is foreseen that no special laws will be drafted for the Blockchain, distributed ledger or crypto economy, but that existing laws will be revised to render them technology neutral.
In July 2018, the Spanish Ministry of Economy and Business published the Draft Law on Measures for the Digital Transformation of the Financial System (“Draft Law”) that intends to bring Spain closer to the verge of financial technology in Europe. This proposal is intended to benefit both entrepreneurs and supervisory authorities.
- For entrepreneurs - it facilitates the verification of the regulatory implications of a project before incurring the time and expenses that involves the administrative authorisation for a regulated activity.
- For supervisory authorities - it will mean being closer to innovators and facilitating the identification eventual risks for consumers.
The above-mentioned Draft Law foresees the creation of a Regulatory Sandbox operating in Spain, as well as the removal of certain obstacles to participants in the Sandbox, the formation of faster communication channels between Fintechs and supervisory authorities (i.e. the Bank of Spain, the Spanish Securities Commission or CNMV and the Directorate-General for Insurance and Pension Funds or even other authorities if needed) and, finally, providing close supervision during the testing phase under the terms defined in each Protocol, which is ruled on a case by case basis.
Additionally, regulators are playing a proactive role in Spain and both the Bank of Spain and the Spanish Securities Commission (“CNMV”) have dedicated units dealing with financial technology issues. The Spanish Securities Commission has a dedicated site for Fintech related issues on its website and has published several documents and Q&A about different Fintech topics.
Furthermore, Spain was one of the pioneering countries in the field of crowdfunding and the regulation of Crowdfunding entered into force on 29 April 2015 (Law 5/2015, of 27 April, Promoting Business Finance, Title V) which covers both equity and loan-based crowdfunding. Given the imminence of a new European Regulation on Crowdfunding and although it is well known that the European Regime does not intend to interfere with national bespoke regimes or existing licenses, it is likely that the existing legislation is to some extent adjusted.
The German supervisory authority BaFin implements a digitization strategy, following market developments rather closely, communicating intensively with new players and adjusting its regulatory practice to new technological developments. BaFin states to pursue a technology-neutral, principle-based, risk-oriented and proportionate regulatory approach. While regulatory sandboxes do not exist in Germany, BaFin states that it will adjust the intensity of the supervision depending on the risk associated with a given business model, taking into account the principle of proportionality: While for identical risks and identical business models identical regulatory standards should apply, BaFin at the same time wants to give new players the room to grow into their regulatory status.
The Korean government is making various efforts to develop Fintech industry including by alleviating the regulation so as to allow Fintech companies with the relevant technology to access the financial market which was permitted only to incumbent financial institutions.
In line with such efforts, the Special Law to Support Financial Innovation, the purpose of which is to facilitate the development and improvement of innovative financial service was enacted on December 31, 2018 and enforced as of April 1, 2019. According to this law, not only financial companies but also non-financial companies may apply for being designated as innovative financial service, which is a type of sand box; if designated, the applying company may be exempt from the relevant regulation for 2 years (maximum 4 years if extended) during which period it may develop and sell innovative financial products without concern for obtaining license or permit or being subject to regulation.
Also, the Korean government provides financial support for such innovative financial service tests and promotes various new attempts. For your information, Lee & Ko has been providing consulting services for the legislature at the time of enactment of the said Special Law to Support Financial Innovation.
In addition to the above, Fintech companies can benefit from the “designated agent” system, which allows financial companies to consign their core work to certain companies designated by the financial authorities to develop and sell new financial products.
The financial regulators and policy makers in Iceland are generally receptive to fintech innovation and the expected changes to the financial services market. In December 2018, the White Paper on the Future of Iceland´s Financial System was published. It stressed, among other things, the importance of the role of fintech in the future of Iceland´s banking system and its possible effects.
The most noteworthy initiatives have been set forth by the FSA, who set up a specific Fintech Help Desk. The Fintech Help Desk assists those who provide, or aim to provide, new financial services classified as fintech. The Fintech Help Desk operates as an internal fintech task force, within the FSA, assisting individuals and companies with regulatory issues or business-specific questions. It is intended to support and promote communication with fintech parties and analyze whether the financial services in question are in accordance with the applicable law and regulations, as well as whether any licenses and/or authorizations are required. The procedure operates in a way that a fintech party sends the “FSA Fintech Questionnaire” to the Fintech Help Desk and then receives a response from the FSA within 10 business days. Subsequently, the relevant fintech party may receive counselling from the Fintech Help Desk by phone (maximum 30 minutes) or request a meeting in person with the Fintech task force (maximum one hour).
Despite the FSA being the main governmental driving force within the fintech industry in Iceland, other pertinent governmental institutions may influence the market, for example, the Consumer Agency, the Icelandic Competition Authority and the Icelandic Data Protection Authority.
As concerns regulatory sandboxes, they have not been implemented in Iceland. However, the White Paper on the Future of Iceland´s Financial System does suggest it as one measure to deal with the rapid fintech innovation. To do so, changes to the regulatory framework would be required to authorize the FSA to grant exemptions in those cases.
We are currently not aware of any such initiatives on the regulators’ behalf. However, we note that the CMVM (the Portuguese Market Securities Commission or CMVM) is actively engaging market players and stakeholders in a recent effort to improve and understand businesses’ concerns and regulatory obstacles currently hindering innovation and new technologies to enter the market.
At the same time, Portugal Fintech has launched an initiative named “Portugal FinLab” which is meant to be a communication channel between innovators and the Portuguese Financial Regulators. Through this channel, the regulators give guidelines pertaining to the regulatory framework that may apply to the projects submitted to them. The purpose of the Portugal FinLab is to support the development of projects that are genuinely innovative and conduct a regulation by design development to such new businesses.
It is the result of a partnership between the regulators Banco de Portugal, CMVM and ASF - Insurance and Pension Funds Supervisory Authority –, along with Portugal Fintech.
This programme has ended its first edition and the first batch of companies has already began their early stages of activity, with some of them starting to partner with big companies and offering their product benefiting from such media exposure and large client-base.
(a) Sandboxing framework: The RBI recently released the ‘Enabling Framework for Regulatory Sandbox’ dated August 13, 2019 setting out the guidelines governing regulatory sandboxes to be set up by the RBI to test new products in a controlled regulatory environment under close supervision. Under the regulatory sandbox framework, eligible entities (including startups, banks, financial institutions and any other company partnering with or providing support to financial services businesses) will be selected for testing their products in the regulatory sandbox. The eligibility criteria include parameters such as: (i) net worth of at least INR 2,500,000 (Rupees two million and five hundred thousand), (ii) satisfactory credit score, (iii) promoters and directors of the applicant entity meeting the prescribed ‘fit and proper’ criteria, (iv) ability to comply with personal data protection laws, and (v) adequate IT infrastructure and safeguards to protect against unauthorised access, alteration, destruction and disclosure. The sandbox is intended to allow for testing of products and technology that (i) are not currently governed by regulations and face some form of regulatory barrier in implementation; (ii) require certain regulatory relaxations for testing; and (iii) seek to improve delivery of financial services. The RBI has indicated that the solution proposed for sandboxing must highlight an existing gap in the financial ecosystem and specifically address how this can be solved.
(b) Stages of the sandbox process: The RBI contemplates product testing by a limited number of eligible entities in a single regulatory sandbox cohort (i.e. end to end sandbox process), where products broadly fall within a shared theme. There is a requirement for the test scenarios and expected outcomes to be clearly defined upfront. The entity must report results to the RBI on an ongoing basis, as per a pre-agreed schedule. While certain regulatory requirements may be relaxed for the duration of the sandbox, the RBI has made it clear that applicants will have to continue to comply with data protection laws and KYC requirements. In addition, applicants will continue to be liable to customers for financial products tested in the sandbox. The framework outlines the 5 stages of the sandbox process for a single cohort, each of which shall be monitored by the FinTech Unit at the RBI (FTU): (i) Stage 1: preliminary screening of applications to the cohort (4 weeks);
(ii) Stage 2: finalisation of test design by the FTU via an interactive process with applicants (4 weeks); (iii) Stage 3: application assessment and vetting of test design by the FTU (3 weeks); (iv) Stage 4: testing by the FTU based on empirical evidence and data (12 weeks); (v) Stage 5: evaluation by the FTU basis the final outcome of the testing of the product or technology that was sandboxed (4 weeks).
In regard to the promotion and encouragement of innovation in the financial sector, it is worth highlighting two aspects that have been incorporated in the recent bill No. 4324-2018-PE submitted to the Congress of the Republic of Peru on May 13, 2019, which aims to regulate the business model of financial crowdfunding. Such aspects are the following:
(i) The forthcoming Law of Crowdfunding gives entities that administer crowdfunding platforms the freedom to set the percentage of interest rates, without any limit.
(ii) The forthcoming Law of Crowdfunding grants powers to the SBS and SMV to temporarily authorize entities to carry out activities or provide services that qualify as innovative models under special conditions conducive to their development (sandbox).
In this sense, the PNIF (National Policy of Financial Inclusion) published last August 3, 2019, proposes as a guideline that regulators evaluate the development of the regulatory framework in order to generate an environment in accordance with new global trends in the provision of financial services. Therefore, regulators must issue a regulatory framework that promotes the digital transformation of financial services.
Finally, the National Plan for Competitiveness and Productivity (Plan Nacional de Competitividad y Productividad) published last July 28, 2019, establishes as a priority objective the adoption of a regulatory framework for the FinTech industry according to the principles for FinTech Regulation approved by the Council of Ministers of Economy and Finance of the Pacific Alliance (Alianza del Pacífico) last July, 2018.
In this sense, it is proposed to have a flexible and dynamic regulatory framework, which would occur, in the first place, with the enactment of the Law of Crowdfunding. Subsequently, it is expected that there will be more legislative proposals for other FinTech business models, and also it is expected that a "FinTech Regulatory Platform" will be available for allowing companies to develop and implement innovative products/services subject to less stringent conditions (sandboxes).
On July 23, 2018 Israel Securities Authority announced the establishment of a regulatory Innovation Hub in the field of Fintech. This initiative was aimed at promoting common discourse between the ISA and relevant players in the field of Fintech. The ISA encourages Fintech companies and entrepreneurs to engage the ISA in order to learn and understand the relevant regulatory framework and to adjust their activity to meet regulation standards, through guidance of the ISA's staff. And at the beginning of 2019 the ISA announced it has joined the Global Financial Innovation Network (GFIN) with financial regulators worldwide including in the UK, Australia, United States, Hong Kong, Singapore, South Africa, and others. [The GFIN is an international network of 29 financial regulators and international agencies, including the IMF and the World Bank Group, for promotion of financial innovation declaring its view to the interests of the investors. The GFIN aimed for establishing an international sandbox and a forum in which leading regulators worldwide can share practical and innovative information. The international sandbox is designed for firms that wish to test innovative products, services, or business models in multiple jurisdictions concurrently.]
The ISA chairman publicly announced on January 2019: “I have placed the field of financial innovation at top of the ISA's priorities and on the agenda of the capital market. Israel is the source of ground-breaking innovations in FinTech, cyber, and other fields. It is our duty to provide the regulatory infrastructure to firms that both protects the interests of the investors and supports the development of innovative technologies that will ultimately improve and enhance the public's access to financial services in Israel with minimum mediation. I invite firms to join us and participate in building a technologically advanced, efficient capital market, with greater value for the investors.”
On July 9th, 2019 the New York State Department of Financial Services and Israel's financial regulators – Supervisor of Banks at the Bank of Israel, Head of Capital Markets, Insurance and Savings Authority and Chairwoman of ISA, signed an agreement to encourage and enable cross-border innovation in financial services technology. Similar agreements were signed also with Croatia, France and Switzerland.
Banking/ payment services:
There is no similar mechanism such as sandbox or hubs with regard to the banking regulator (the Bank of Israel) and the non-banking payment services regulator (the Supervisor of Regulated Financial Services). The Bank of Israel does try to encourage innovative technology implementation in the banks, but demad that any such implementation shall be carried out cautiously. The board of each banking corporation is required to form an innovation committee and to consult with experts.
On June 23, 2019 the Supervisor of the Banks had issued a circular to the banking corporations which outlines the Supervisor's position on how banks should embrace innovation in a way that considers the risks inherent in it:
- In accordance with the requirements of Proper Banking Conduct Directive 301, banking corporations are required to formulate a clear and holistic approach to adopting innovation in their banking activities.
- Banking corporations have to ensure that the strategic approach to innovation, based on the integration of technological capabilities, addresses, inter alia: Improvement of customer experience in banking services; make operational processes more efficient and automatic including compliance aspects; and increase the competitiveness of the banking corporation.
- Banking corporations are required to assess the various risks arising from the implementation of new and innovative products and services.
- Banking Supervision encourages banking corporations to establish internal sandboxes that will enable them to test new technologies, including in collaboration with FinTech companies and their suitability to the processes existing in a banking corporation.
- The Banking Supervisor acknowledges that innovation initiative experiments are sometimes accompanied by risks. therefore, creating an experimental environment for examining the risks is an important consideration in the examination and approval process by the Bank of Israel.
- Banking Supervision wishes to remove regulatory barriers to innovation and infrastructure development that will facilitate innovation, updating communications banking instruction, cloud technology, and setting an open banking standard.
The AFM and DNB jointly launched two initiatives in 2016 and 2017 with the aim of both facilitating fintech companies, as well as gaining knowledge of and experience with innovative business models used by fintech companies: the InnovationHub and the ‘Regulatory Sandbox’.
Whilst the InnovationHub is meant to facilitate fintech start ups with qualifying their contemplated business model and assessing the applicability of financial regulatory laws on such business model, the Regulatory Sandbox is supposed to go a step further. Within the Regulatory Sandbox environment, a fintech company could – theoretically – opt for a more proportionate regulatory treatment and apply for a customized license or partial license. We emphasize the current theoretical character of this sandbox. Due to European legislation rather than national legislation generally determining the regulatory framework applicable to fintech companies and due to the limited discretionary powers granted to the Dutch regulators by the Dutch Ministry of Finance or the Dutch legislator (other than for example the relatively broad mandate of the FCA in the UK), the Dutch regulators experience difficulty in offering a fintech company a deviating treatment compared to other financial undertakings.
In a recent evaluation report, the regulators concluded that ‘both initiatives are playing an important role in responding to innovation in the financial sector’. They also acknowledge that maintaining an open dialogue with fintech companies is essential to continuously stimulate innovation. To this end, DNB recently launched iForum through which it envisages to share best practices in the fintech sector.
In order to encourage Fintech innovation, the JFSA introduced the “Fintech Testing Hub” in September, 2017. The JFSA sets up, on a case-by-case basis, a support team that helps Fintech companies and financial institutions identify and solve potential legal issues and risks associated with new Fintech schemes.
In June, 2018, the headquarters of Japan’s Economic Revitalization of the Cabinet Secretariat opened a cross-governmental one-stop desk for the Regulatory Sandbox Scheme in Japan. The resource, available to Japanese as well as foreign companies, enables applicants (once approved) to carry out, under certain conditions, a demonstration of their projects even if such activities are not yet covered under current laws and regulations and without requiring a legal amendment. Blockchain technology, together with AI, IoT and big data, are explicitly mentioned in the basic policy as prospective and suitable areas.
Jersey recognised cryptocurrencies as a separate asset class long before the “ICO Craze” of 2017 when the island’s regulator, the JFSC, licensed the world’s first Bitcoin-focused regulated fund (GABI Plc).
In terms of testing products and services, the JFSC has proven itself to be a pro-active and forward-thinking regulator. The JFSC is a member of the Global Fintech Innovation Network (a group of international regulators and observers committed to supporting innovative products and services) and participates in the cross-border testing pilot, which launched in January 2019, offering firms the opportunity to test their products and services in multiple jurisdictions.
Jersey also strives to promote fintech development by supporting local fintech talent through a government-backed economic development agency and industry association dedicated to the growth of the digital sector, Digital Jersey.
Jersey also operates a sandbox run through Digital Jersey, supporting local fintech firms and fintech firms seeking to relocate to Jersey. For completeness, we note that the window for applications to participate in the January 2020 pilot has now closed.
In terms of promoting fintech and thought-leading in Jersey, the Digital Assets Working Group (the “DAWG”) works hard to raise awareness and interest in Jersey. Combining representatives of the States of Jersey, representatives of the JFSC and other interest groups on the Island, the DAWG is a group of individuals knowledgeable in the fintech space promoting digital assets and blockchain technologies in Jersey. Carey Olsen is a founder member of the DAWG and is an active participant and contributor.
The FMA has established a Regulatory Laboratory/Financial Innovation Group in its executive board. The group responds to enquiries from fintech companies and expands the FMA's understanding of the field. As a single point of contact for fintech enquiries, the Regulatory Laboratory has a pre-audit and filter function, a triage function and an allocation and coordination function within the FMA.
The FMA also has created a 'FinTech in Liechtenstein' section on its homepage, where the FMA offers initial information regarding the regulatory framework for fintech companies and provides an illustrative overview of possible business models and potentially applicable legislation.
The issuance of the Fintech Law itself encouraged innovation; some of the new regulations issued by the financial regulators, especially those enacted by the Mexican Central Bank, instilled the use of innovative technology across different areas (see mobile payments reference in Q2 above). On the other end, a regulatory sandbox approach has been adopted under the Fintech Law and regulation; pursuant to this special regime, all entities intent on operating an “innovative model” —which, under the Fintech Law, is any model which uses tools or technological means for performing financial services with modalities different from those existing in the market—, including financial entities (insofar as the provisions governing them do not allow for the corresponding model,) must receive a temporary authorisation from the corresponding financial authority for them to be governed under a so-to-speak “lenient” legal regime. Unfortunately, the Fintech Law and regulations failed to include “minimum period” requirement concerning the authorisation, which is necessary for the entity requesting the authorisation to achieve sufficient results or have a performance that provides enough evidence to justify the inherent benefits of the proposed “innovative model”.
Recently, Luxembourg has taken a number of initiatives to create a favourable environment for fintech start-ups. The Ministry of Economy of Luxembourg together with private partners has, for example, set-up an EUR 20 million Digital Tech Fund that invests, in particular, in cybersecurity, fintech, big data, digital health, media & next-generation communication networks, digital learning, the internet of things, telecommunications and satellite services.
Furthermore, a public/private sector initiative in the form of a national Fintech innovation hub was launched: the Luxembourg House of Financial Technology (the "LHoFT"). The LHoFT brings together financial institutions, FinTech innovators, research, academia and public authorities to help drive forward the development of (financial) products, which meet specific industry needs. The LHoFT has a strong network with FinTech players around the world, encouraging domestic/international collaborations, working groups and initiatives and offers a tech-friendly base to (non-EU) FinTech players seeking opportunities to explore the European Single Market.
Commitment from the industry in engaging with the FinTech community is also demonstrated by dedicated working groups initiated by industry associations, such as the Association of the Luxembourg fund industry ("ALFI") and The Luxembourg Bankers’ Association ("ABBL").
From the regulator's end, the CSSF has not put in place regulatory sandboxes or other equivalent regulatory derogation schemes. The CSSF is, however, very open to discuss complex questions and it has a specific department focusing on innovation and FinTech. It also regularly provides guidance on particular issues, such as its approach towards robo-advice, ICOs, virtual currencies, artificial intelligence and video KYC onboarding (see: http://www.cssf.lu/surveillance/fintech/). At the end of 2018, the CSSF has signed a MoU with the Australian regulator on finTech and RegTech.
On the 1st of January 2019, the Malta Gaming Authority launched a 10-month sandbox environment for the acceptance of virtual financial assets and the use of distributed ledger technology within the Gaming Industry. A sandbox was also established by the MFSA which provides financial service providers with the facility of testing out the viability of their product within the regulatory framework, whilst remaining in direct contact with the regulators. Additionally the MFSA has published a fintech strategy to promote a high standard of innovation within the industry through inter alia the creation of the Malta Fintech Innovation Hub, combined with the establishment of links across various jurisdictions, the cultivation of a national talent pool within the fintech industry and the implementation of robust cyber security measures.
The newly-set up regulator, the Malta Digital Innovation Authority (’MDIA’), was established to act as a fintech promoter incentivising investment on innovative technology arrangements as such terms are defined under the MDIAA, and as a supervisory authority, ensuring reliability of such technologies and integrity of the market.
In the Malaysian market the regulatory bodies are providing strong support and accelerating fintech growth. Bank Negara Malaysia (“BNM”) seeks to provide a regulatory environment that is conducive for the deployment of fintech. This includes reviewing and adapting regulatory requirements or procedures that may unintentionally inhibit innovation or render them non-viable. As part of this process, the Financial Technology Regulatory Sandbox Framework (“BNM Framework”) is introduced in 2016 to enable innovation of fintech to be deployed and tested in a live environment, within specified parameters and timeframes. The BNM Framework also is to enable the experimentation of fintech solution in a live environment, subject to appropriate safeguards and regulatory requirements. BNM has demonstrated its desire to grow and encourage the industry by approving several firms to operate within BNM Framework.
The Securities Commission of Malaysia (“SC”), which regulates the Malaysian capital markets, has adopted a digital markets strategy intended to enhance access to financing, increase investor participation, augment the institutional market and develop synergistic ecosystems for the capital markets in Malaysia. Stockbroking, provision of investment advice, financial planning, dealing in derivatives and advising on corporate finance are among the activities regulated by the SC under the Capital Market Services Act 2007 (“CMSA”).
In 2015, the SC launched the ‘Alliance of FinTech Community’ (“aFINity@SC”). This is an initiative facilitated by the SC to catalyse greater interest towards the development of emerging technology-driven innovations in financial services, whether existing or prospectively developing in Malaysia. aFINity@SC is about forming a network of community engagements among relevant FinTech stakeholders towards spurring more FinTech-focused innovation. The SC will work together with relevant fintech-related stakeholders including innovators, entrepreneurs, established businesses, investors and other authorities, as part of a concerted effort to accelerate growth and innovation in the financial market.
In addition, as part of SC’s effort to nurture and facilitate market-based innovation in fintech under the aFINity@SC initiative, the regulatory framework for equity crowdfunding (“ECF”) was introduced in February 2015. The SC has approved a number of crowdfunding platforms through which individuals can invest their money. For examples, FundedByMe (Alix Global), Ata Plus, Crowdonomic, Eureeca, pitchIN and Crowdplus. Continuing on the initiatives, SC has introduced the regulatory framework for peer to peer (“P2P”), setting out requirements for the registration and obligations of a P2P operator as provided in the revised Guidelines on Recognized Markets in May 2016 (Revised further in January 2019). The P2P framework will enable eligible businesses and companies to access market-based financing to fund their projects or businesses via an electronic platform.
Additionally, the Financial Technology Enabler Group (“FTEG”) was established by BNM in June 2016 to support innovations that will improve the quality, efficiency and accessibility of financial services in Malaysia. Comprising of cross functional group within BNM, the FTEG is responsible for formulating and enhancing regulatory policies to facilitate the adoption of technological innovations in the Malaysian financial services industry. The FTEG has also launched a fintech regulatory sandbox, a live regulatory environment where fintech products can be deployed and tested within specified parameters and timeframes. The idea behind the sandbox is to ensure that FTEG can catch regulatory and compliance policies that may inhibit innovation in the financial service sector, by looking at how fintech start-ups operate and what using their products entail.
With this active government support, Malaysia’s fintech ecosystem is on the fast track for growth and development.
MAS has laid down some general principles underlying its approach to FinTech regulation. First, MAS has indicated that regulation should not “front-run” innovation. Instead, it would monitor new innovative offerings, and would continually evaluate whether there is a need to step in to regulate. In addition, any regulation should be introduced when the risks arising from the new technology are material or crosses a certain threshold, and that regulation should be proportionate to the risk posed. Last, the MAS would seek to incentivise risk mitigation aspects resulting from the new technologies while restraining any new risks created.
In order to encourage innovation by FinTech companies, MAS put in place the MAS FinTech Regulatory Sandbox (in 2016) and the MAS FinTech Regulatory Sandbox Express (in 2018), which are both special licensing regimes created for FinTech entities. In essence, the Sandbox and the Sandbox Express will enable financial institutions and FinTech players to experiment with innovative financial products or services in a live environment but within a well-defined space and duration, by relaxing specific legal and regulatory requirements.
In addition, the MAS has issued “softer” regulatory instruments, such as guidelines, which provide interpretative guidance on the application of existing legislation to innovative FinTech solutions. These include the MAS’s Guidelines on Provision of Digital Advisory Services and A Guide to Digital Token Offerings. The MAS has also issued several guidelines outlining its expectations of financial institutions so as to address the risks from new technology solutions, such as the E-Payments User Protection Guidelines.