Regulators consult on the creation of a global fintech sandbox

The working group – which includes the Australian Securities and Investments Commission (ASIC), the UK’s Financial Conduct Authority (FCA), the United States Consumer Financial Protection Bureau (CFPB), and the Ontario Securities Commission (OSC) – has launched a consultation on the mission statement for the Global Financial Innovation Network (GIFN), its proposed functions, where it should prioritise activity, and the role the collaborative body should play in delivering its objectives, including the tools it will use.

The GIFN consultation paper, released on Wednesday (8 August), states that network could have three main functions:

• Act as a network of regulators to collaborate, sharing experience and best practice, and communicate to firms;
• Provide a forum for joint policy work; and
• Provide firms with an environment in which to trial cross-border solutions in both B2B and B2C sectors.

The pace at which technology is advancing in the financial sector, with recent developments including initial coin offerings, cryptoloans, and real-time payments and settlements, has been widely cited as a challenge for regulators. This is because the risk of regulatory failure increases in line with how far regulators are behind the products and services in the market.

For example, Reserve Bank of Australia assistant governor, financial system, Michelle Bullock acknowledged earlier this year that innovations such as blockchain, artificial intelligence, and cryptography could improve payment experiences, support new payment instruments and boost competition in the financial system, but warned that there are inherent risks associated with introducing new technologies that regulators need to mitigate, such as cyber threats and large-scale technical failures.

Speaking of the new GFIN, ASIC commissioner John Price said: “The proposal for a Global Financial Innovation Network is a really important concept for regulators like ASIC who are actively engaged in understanding and harnessing the benefits of innovation in financial services for consumers, while managing the potential harm.”

He added: “There is great potential through a group like the GFIN to help share the experiences and knowledge from across different markets, while also providing a platform for innovative firms wishing to scale their propositions via testing in multiple countries.”

The working group is also consulting on the creation of a cross-jurisdictional sandbox for fintech, regtech, and suptech solutions to be tested simultaneously across international markets so that regulators can stay on top of innovation trends and address potential cross-border problems.

The consultation paper stated that there is “sufficient merit” to continue exploring the idea, given the onslaught of products and services that watchdogs are trying to manage the risks of within their own regulatory frameworks.

“Innovations that do not fit within the existing regulatory framework could benefit from this function,” the working group noted in its consultation paper.

“Likewise, it would provide regulators an opportunity to observe emerging business models and technology up close to help inform policy and supervisory work.”

Financial market players have also cited the different regulatory approaches to mitigating risks associated with emerging technologies and business models as barriers to realising or scaling new ideas across markets, according to the working group.

“Under current conditions, innovation initiatives operated by financial services regulators tend to be domestically focused. There is currently no global platform allowing firms to trial new ideas with consumers or other market participants in multiple jurisdictions working with the appropriate regulatory authorities,” the consultation paper stated.

“Facilitating cross border trials is about ensuring the potential benefits of financial innovation are shared across jurisdictions with consumers, regulatory authorities and other market participants.

“Such a function should also work on an opt-in basis for regulators to allow flexibility and discretion on the part of those involved.”

The idea for a global sandbox was initially floated by the FCA in February this year.

Submissions to the GIFN consultation are being accepted until 14 October 2018.

[Related: Regulators ‘working through’ systemic risks posed by fintechs]