FinTech Regulation Competition -- Part 2
The timing could not have been better to start a blog series on sandboxes and regulatory competition. You can read the first post HERE.
Yesterday's announcement from the U.S. Commodity Futures Trading Commission, launching LabCFTC, illustrates the regulatory momentum towards creating more user-friendly experiences for innovative companies in the financial technology space. We count this as a FinTech sandbox because it incorporates the individualized guidance and advice components that characterize all sandboxes globally. Leaks from Brazil indicate Latin America will join the sandbox movement in 2018.
These developments warrant an updated global FinTech Sandbox chart. You can find the updated chart at the bottom of this post. At this rate, the chart will need to be updated again before this blog series has been completed.
Policymakers in London started the sandbox trend in late 2015. The term "sandbox" has been thrown around loosely ever since. It means many things to many people. Advocates in the United States use it to press banking regulators for a limited purpose banking charter. FinTechs flock to jurisdictions like Singapore that provide subsidies to start-ups and jurisdictions like the UK, Singapore, Canada and even Thailand that promise to waive or modify regulatory requirements for qualifying firms.
But are jurisdictions really competing with each other? Today's post focuses on the most-watched element of the "sandbox" toolkit: access to regulated financial markets through limited-purpose licensing.
Limited Purpose Licensing -- Look Past the Hype
Regulators in leading financial centers from the GCC (Abu Dhabi) to Asia (Malaysia, Hong Kong), the Pacific (Australia), North America (Canada) and of course the UK all provide promising, qualified, selected FinTech companies with limited purpose licenses. Some regulated firms peer nervously over their shoulders at potential competitors not burdened with the full range of regulatory responsibilities.
But look carefully at what the limited purpose charters promise. This is far from an unfettered, unregulated opportunity. All jurisdictions that offer this opportunity do so on a very limited basis. The charters are offered only for a limited purpose (to test product functionality) and only for a limited time (on average, 12 months). Some jurisdictions limited the limited purpose charter to only one sector (e.g., securities). Some nations go farther, limiting the limited purpose charter to services and solutions that are not already available in the regulated market or limiting the charter to the trading (securities or commodities) sectors.
Sandbox Licenses -- Are They Sandtraps?
If you are a hungry start-up FinTech company, the sandbox license seems like a marvelous opportunity at the beginning. You can test (and sell to investors) your technology without having to worry about the full brunt of regulatory burdens. In some jurisdictions, you may be able to acquire customers (as well as their credit and usage data!) sufficient to hone your use case and create a glide path for graduation from the sandbox in the future.
The reality is that 12 months is a very short time to launch a product, create a revenue stream AND prepare to exit the regulatory safe zone on a "cold turkey" basis.
Policymakers in Australia recognize the magnitude of this challenge. As noted in the most recent issue of the FinTech RegTrends Report, the 2018 proposed budget in Australia includes a doubling of the sandbox tenure from 12 months to 24 months.
This move in Australia raises the following question: could sandboxes become sand traps that make it difficult if not impossible to leave the safe space without taking significant penalties and without eliminating the ability to win the competitive game? By the end of 2018, we will know the answer to this question. The answer depends, in part, on whether successful exit is defined as exiting as an independent, profitable firm or whether, instead, it is defined as successfully merging with a larger, regulated firm.
Sandbox Licenses -- Cross-Border Competition?
Are policymakers competing with each other to establish and manage FinTech sandboxes? The evidence here is mixed.
There is no question that sandboxes are proliferating (as our infographic illustrates).
If policymakers were competing with each other, we would see different terms emerging for the sandbox licenses. Instead, we see striking uniformity.
Policymakers in all regions are unanimous in issuing licenses that are ONLY useful for testing....and then only for a short period of time.
No policymaker has indicated that a sandbox license will guarantee issuance of a full banking, securities, or insurance license. Even those jurisdictions that have offered opportunities to receive No-Action or Waivers/Modifications from regulatory burdens (notable, the UK, Singapore, Canada, and Thailand) have made clear that lenience is limited to the testing period. Again, uniformity prevails and it is transitory in nature.
Now look at the proliferating web of cooperation agreements among Fintech-friendly jurisdictions. The vast majority of these agreements provide fast-track access through referral mechanisms to other sandboxes abroad. A handful of these agreements are limited to confidential information-sharing about FinTech sector developments and regulation. The UK has been the most prolific, with policymakers executing agreements with other leading financial centers in Asia/Pacific (Singapore, Australia for referrals; China and South Korea for sharing information) and North America (Canada). Australia has also been active, including agreements with Canada and Kenya. Thailand and Japan have executed cooperation agreements.
These cooperation agreements are being struck among the most FinTech-friendly jurisdictions on the planet. They pave the way for cross-border movement for qualifying firms. These are not actions consistent with regulatory competition.
Policymakers globally certainly are racing to capitalize on the promise that FinTech innovation can bring. However, these data suggest that traditional notions of competition do not apply at present.
If regulators are competing with each other, it does not seem to be with respect to the licensing component of sandbox frameworks. The question then becomes whether they are competing with each other on other sandbox components. The rest of this blog series will look at the other components of the sandbox frameworks separately, so stay tuned!
Earlier this week, leaks to the media indicated that Brazil is preparing to launch its own FinTech sandbox. Yesterday, the CFTC launched a platform that provides some sandbox components while stopping short of promising to issue special purpose or testing licenses. These developments will be analyzed for subscribers to the FinTech RegTrends Report on Saturday.
In the interim, our infographic requires updating. Please see the updated chart below. Thank you to those of you that have chuckled and appreciated at the use of palm trees to signify the presence of sandboxes.
Some have asked why Africa is not represented given Kenya's use of M-Pesa. The answer is that to date the Central Bank of Kenya does not seem to have launched a full-scale sandbox.