Chapter 3: Regulatory sandboxes

Question 1

Why do regulators face heightened pressure to tackle the regulatory challenges?

Answer 1

National regulators often struggle to enforce existing regulations or implement new ones onto the evolving business environment in a timely and proper manner, leaving many FinTech companies and financial institutions uncertain about how they may implement innovative technologies in a compliant manner.

Question 2

What is a regulatory sandbox and how is it used?

Answer 2

The regulatory sandbox is a regulatory framework under which
FinTech companies can test their products on real-world consumers
in a controlled, demarcated market space, while benefitting from
certain temporary exemptions from full compliance with the relevant
regulatory regimes but under the supervision of a regulator.

Question 3

What are some objectives that can be achieved by using a regulatory sandbox? (2)

Answer 3

1. the lowering of barriers to entry for new entrants into the financial services industry
2. consequently promoting competition and socially beneficial innovation.

Question 4

For what reasons should a regulatory sandbox not be adopted?

Answer 4

a regulatory sandbox should not be adopted simply to lure FinTech investment with the promise of relaxed regulation at the expense of consumer protection or financial stability.

Question 5

Explain 4 characteristics that most regulatory sandboxes share.

Answer 5

1. The testing scope will be limited based on the regulatory authority of the regulatory sandbox administrator.
2. Parameters include the length of testing period and the number and type of participating consumers.
3. Most regulators do not specify which regulatory requirements would be waived or relaxed.
4. Successful testing will generally lead to the full registration or authorisation of the participant.

Question 6

Explain how the Monetary Authority of Singapore deals with the requirements of a regulatory sandbox.

Answer 6

Monetary Authority of Singapore is flexible on the requirements relating to, licensing fees, participant’s capital requirements, leadership composition and credit ratings.
However, they will not relax compliance standards in relation to
the confidentiality of customer information, management fitness,
the handling of customer money and assets by intermediaries, and
AML/CFT measures.

The Monetary Authority of Singapore also took the risk-based approach one step further in launching its ‘Sandbox Express’, which provides fast-track approvals for testing for activities that are recognised as low risk, such as insurance broker activities.

Question 7

What are the 2 main challenges in designing and operating a sandbox based on Bromberg et al.’s article?

Answer 7

1. delivering a sandbox that lowers barriers to testing within the existing regulatory framework and
2. ensuring that risks from testing novel solutions are not transferred from businesses to consumers.

Question 8

What are the benefits of regulatory sandboxes? (6)

Answer 8

1. Opportunity for FinTech companies and regulators to collaborate and exchange information relating to the innovative product, the industry and the regulatory landscape.
2. Opportunity for regulators to become more involved in the oversight of new financial technologies.
3. Fintech companies will save costs on reduced legal advice regarding the regulation applicable to their service.
4. Sandboxes will allow the risks posed by innovation to be improved via testing in a controlled environment.
5. Fintech companies could prepare for an application for full modified authorisation with the assistance of the regulator while in the regulatory sandbox.
6. Contacts with the regulator and the credibility that the participation in the sandbox gives them customers and financiers.

Question 9

Based on the AMF what is a criticism to the regulatory sandbox regime?

Answer 9

that it would create a split, and thus a discriminatory regulatory regime.

Question 10

What are 3 classes of participants identified by the AMF?

Answer 10

(a) established companies that wish to implement FinTech innovations but are subject to the full extent of applicable regulation;
(b) participants, chosen by the regulator, which enjoy a lower level of regulatory compliance; and
(c) newly established companies, not selected by the regulator, and therefore subject to the same rules as the companies in (a).

Question 11

What was the approach of the AMF instead of establishing a regulatory sandbox?

Answer 11

Instead of establishing a regulatory sandbox, the AMF opted to pass new regulation to address specific forms of new FinTech products and institutions.

Question 12

Explain an advantage and a disadvantage of the AMF approach.

Answer 12

Advantage: This approach may provide regulatory certainty since it affects all relevant entities generally,
Disadvantage: but in light of the pace of technological development, there is a very real
possibility that any new regulation would not be imposed fast enough to comprehensively manage the effects of such FinTech products or would become outdated.

Question 13

Explain the shortcomings of regulatory sandboxes. (4)

Answer 13

1. A discriminatory regulatory regime
2. Administration
3. Scalability of FinTech products tested in a regulatory sandbox
4. The potential ‘race to the bottom’ by regulators

Question 14

Explain the administration shortcoming.

Answer 14

1. It can be costly
2. It requires technological aptitude of the administering regulators, and given the wide range and complexity of technologies being developed in the FinTech sector, it is
   unlikely that regulatory sandbox administrators would have expertise in all products being tested.

Question 15

Explain the scalability of FinTech products tested in a regulatory sandbox shortcoming.

Answer 15

May prove to be less beneficial or even harmful to consumers and the financial system
at large once removed from the confines of the regulatory sandbox.

Question 16

Explain the potential ‘race to the bottom’ shortcoming.

Answer 16

If a regulator cannot attract participants to its sandbox with its reputation for high
programme quality, its next most accessible competitive strategy might involve the lowering of the entry criteria, an expansion of the regulatory exemptions on offer, or lax supervision during the testing period.

Question 17

What are 3 consequences tot he race to the bottom shortcoming?

Answer 17

1. is bound to lead to compromises on consumer protection
2. financial stability.
3. This, in turn, would lead to the erosion of a regulator’s credibility in the eyes of all stakeholders, including consumers.

Question 18

What is the main difference between the UK FCA sandbox and the Australian ASIC sandbox?

Answer 18

So long as start-ups meet the eligibility criteria for the FinTech-licensing exemption, there is no application process at all: all that is required is notification to the ASIC of the intention to rely on the exemption and the provision of certain information.

Question 19

Explain 2 advantages to the Australian approach of eligibility of sandbox participants.

Answer 19

1. that it is less intensive to operate because it does not require the regulator
   to consider and approve each individual application.
2. the ASIC’s approach of not requiring an upfront demonstration of ‘genuine innovation’ for a company to be able to take advantage of the licensing exemption is better than the FCA’s requirement, given that it is questionable whether a regulator has the requisite ability to make such a determination.

Question 20

Explain 2 criticisms to the Australian approach of eligibility of sandbox participants.

Answer 20

1. that the ASIC’s licensing exemption will reduce the ASIC’s ability to learn about
   emerging financial technologies and become more engaged in the oversight of new financial technologies.
2. Moreover, the ASIC’s model has drawn criticism from consumer groups, which are concerned that the industry licensing exemption does not create a safe environment
   for innovation.

Question 21

Which are 5 requirements to be eligible for participation in a regulatory sandbox?

Answer 21

 the innovation is potentially within the scope of the FCA’s regulatory regime;27
 the idea is a genuine innovation;
 there is a consumer benefit;
 there is a need for a sandbox, including which tool and why, and
 the business is ready for testing.

Question 22

What are the 3 main functions of the Global Financial Innovation Network?

Answer 22

1. to act as a network of regulators to collaborate and share
   experiences of innovation in their respective markets
2. to provide a forum for joint policy work and discussions and
3. to provide firms with an environment in which to trial cross-border
   solutions.

Question 23

What is the main difference between sandboxes and innovation hubs?

Answer 23

The main difference between these two models lies in the nature of the facilitation, because while innovation hubs provide a platform to exchange knowledge and informal guidance, a regulatory sandbox usually implies some lenience or supervisory discretion about the way in which the regulatory framework applies to innovative products or services.

Question 24

Typically, regulatory sandboxes involve several phases – from application to exit. describe the stages.

Answer 24

1. Application
2. Preparation
3. Testing
4. Evaluation