Introduction
The introduction of new, innovative products and services is always driven by companies with a test-and-learn approach. However, in the financial industry this approach faces certain challenges:
In the new Fintech era, regulatory and supervisory authorities also face new challenges. In particular, it is necessary to find an agile and flexible way to ensure that innovation in the financial sector is compatible with the basic principles of consumer protection, financial stability and market integrity set out in the regulations. There are two alternatives: do nothing about it, or allow companies to innovate and enter the market without any form of control. The first entails two main risks. On the one hand, it would condemn the banking sector to lose competitiveness and its capacity to innovate, compared with institutions in other countries with frameworks more geared towards financial innovation, or compared with new entrants subject to more lenient regulatory and supervisory frameworks. On the other hand, it would discourage virtuous circles of cross-sector innovation that can significantly shape the country’s position in terms of growth and modernisation. The second, by contrast, in principle supports innovation, but compromises consumer protection, financial stability and market integrity—fundamental pillars of the regulation agreed by national and supranational authorities in recent decades.
In several countries, supervisory authorities have already implemented instruments to respond to the innovation needs of financial-sector products and services, open to participation by both licensed firms and those that need to obtain a licence.
One of the instruments gaining the greatest traction among authorities in different countries is the establishment of a regulatory testing ground or sandbox. A regulatory sandbox is a special set of rules that allows companies to test their innovative products and services in a safe, limited environment, with the possibility of obtaining exemptions from certain requirements of the regulatory or supervisory framework, or assurances in cases of regulatory uncertainty. In other words, tests in a sandbox can be carried out with a full or partial exemption from certain regulatory requirements, or with a written commitment from the authorities not to take action against participating companies, provided they comply with the agreed conditions. Once the testing period has ended, solutions may be discarded or introduced into an unrestricted environment—that is, launched to market.
The Spanish banking industry supports the idea of creating a sandbox in Spain that enables banks and companies wishing to offer innovative financial services to develop products in this type of environment. It should be noted that Spanish banking believes that, insofar as banking business and digitalisation are global and cross-border in nature, in the medium term it will be necessary to have a common European sandbox framework, limiting regulatory arbitrage that may arise from the different treatment of testing environments in each country. We understand, however, that until this EU initiative becomes a reality, Spain must adopt its own national solution in order not to lose competitiveness vis-à-vis other markets and companies, and it should be coordinated as closely as possible with similar developments in Europe. In addition, the Spanish regulatory sandbox may be an appropriate solution for those companies that, at least initially, only intend to apply their innovation in the Spanish market.
As the financial authorities are still reflecting on the characteristics that the future Spanish sandbox should have, this position paper aims to convey the banking industry’s views on the matter.
A sandbox or testing ground for the Spanish market
One of the key aspects when introducing a sandbox or testing ground in the Spanish market is to clearly establish its purpose and identify its potential as a tool serving regulators and supervisors, participants and, ultimately, end users of financial services. To this end, several aspects must be taken into account regarding its purpose, value and implementation:
The sandbox is not intended to lower regulatory standards per se. On the contrary, consumer protection is one of the reasons that justify it (testing new technologies with a small group of volunteer customers who have given their full consent, and with safeguards for consumers and users against potential incidents). The idea is to seek proportionality in regulation during the experimentation phases of new technologies and business models, so that regulation does not become an obstacle to innovation.
What matters is that participating companies, as well as regulators and supervisors, learn and gain experience from these pilot tests and assess how to bring them into real-world operation, for the benefit of consumers or end users. The former understand the basic rules and can benefit from the supervisor’s advice on potential risks and how to mitigate them. The latter, by contrast, can obtain highly valuable information. The supervisor can take the pulse of the market first-hand from the early stages of the innovation process and, on that basis, assess the implicit risks, the advantages of new products and the possible existing regulatory barriers to bringing a specific innovative project to market. This analysis would make it possible to identify and implement changes in supervisory or regulatory practices in order to facilitate innovation where it benefits consumers. Ultimately, sandboxes can help financial authorities as much as the companies developing the projects.
In the EU context, it may be necessary to consider how the conclusions that national authorities draw from their local experiences should be transferred to the EU framework, thereby leveraging cross-border synergies and avoiding future regulatory arbitrage.
To truly harness the potential benefits of introducing a sandbox, sufficient technical and human resources are required within the authorities responsible for its management—along with coordination among the different authorities—for proper implementation and oversight. Without adequate resourcing for its launch, the potential of a sandbox may be diminished, missing the opportunities it offers the national market in terms of innovation and competitiveness.
As is the case in most sandboxes already in operation, in Spain participation should include both authorised (licensed) and unauthorised (unlicensed) providers of financial services.
We believe that all of them—whether new entrants or incumbents—share the same objective of testing the viability of an innovative solution, and the same need to leverage the benefits of participating in the sandbox: eliminating regulatory uncertainty, reducing time to market for new products and services, and increasing investment opportunities.
Spanish banking considers it preferable for innovation projects eligible for acceptance into the sandbox to be assessed individually, determining on a case-by-case basis the most appropriate treatment for the testing period in the sandbox. We believe this alternative is preferable to a broad approach such as the Australian one, in which there is no such individual assessment, but rather a universal one under predefined parameters. The chosen individual assessment approach makes it possible to conduct a more specific analysis of the implicit risks and the most appropriate regulatory waivers.
One of the main decisions the regulator/supervisor faces when implementing a testing ground is choosing the types of projects that may participate.
Although there are different international approaches, in most cases it is the sandbox supervisor who sets the project assessment criteria with a certain degree of flexibility, focusing on two main pillars: innovation and regulatory uncertainty.
For us, this approach is the most suitable for innovation in the national market. In our view, when assessing criteria for accepting projects, the supervisor should take the following issues into account:
It should be noted that the focus of these assessment criteria must be broad enough to include, among the selected projects, innovations with indirect effects on consumers and users related to regulatory compliance, such as new reporting tools that deliver efficiency gains, improve risk management and generate indirect benefits for end customers.
