A Quantitative Approach To Regulate Financial Innovation Discussant: Dirk Zetzsche, Roberta Consiglio & Robin Veidt, University of Luxembourg Date: 27 March 2020 Agenda - Introduction - Existing Work on Sandboxes and Existing Empirical Studies - Research Questions - Preliminary Results - Work Plan and Next Steps - Conclusion Introduction - Regulatory Sandboxes: prominent solution for regulation that may pose entry barriers to new, innovative fintech companies - Several FSAs took alternative paths / supplemented existing sandboxes with alternative approaches - We conducted empirical research with a focus on all tools, including innovation hubs and informal ways of promoting FinTech innovation • What exactly are the preconditions and modus operandi of existing regulatory tools worldwide? • To what extent do these different tools interrelate in furthering financial innovation? Existing Work On Sandboxes And Empirical Studies - General literature on fintech and the different ways of regulating innovation - Legal discussion mostly focused on regulatory sandboxes and innovation hubs - Existing empirical work either focused on specific geographical areas or from specific perspective (e.g. financial inclusion) - • CGAP (2017) • ESAS (2018) • UNSGSA (2019) • BIS (2020) Current literature lacks an overview of most important fintech jurisdictions, their detailed challenges and approaches to regulation - Filling the gap with our empirical research • Surveying supervisory authorities • Analyzing publicly accessible information • Using a truly global approach, enabling an analysis of developing and developed countries • Give insights into the most pressing challenges faced by innovators and FSAs alike • Indicate the effectiveness or otherwise of different regulatory approaches towards innovation - Identify one regulatory framework, or a combination of regulatory frameworks, that can work best to further fintech innovation Research Questions - Relationship of sandboxes vs. substitutes • Substitutes: innovation hubs, fintech waivers, no-action letters, tech-pilots. • Do substitutes for sandboxes achieve the same effect as sandboxes? • Do jurisdictions with sandboxes perform better or worse than their peers without a sandbox? - Preconditions for a successful sandbox • - Costs of a sandbox • - What are the ideal preconditions for sandboxes to operate efficiently? What do sandboxes require, in terms of resources, to operate efficiently? Fintech ecosystem • How do FSAs manage and promote communication with fin techs? • How do FSAs within the same jurisdiction organize to regulate fintech innovation? - Cooperation regulated vs. fin techs firms • Do FSAs grant regulatory advantages to fintech serving only licensed financial intermediaries? • How is the cooperation of established licensed intermediaries and unregulated fin techs supervised? • How is outsourcing to licensed entities treated in contrast to unlicensed entities? • What are the most important benefits provided by fin techs to licensed intermediaries? Preliminary Results - Relationship of sandboxes vs substitutes (regulatory and non-regulatory) • Pro-innovative regulatory tools: innovation hubs, tech-pilots, no-action letter and fintech-waiver policies. • 67% has 1 or more pro-innovative regulatory tools in addition to sandboxes. • Pro-innovative non-regulatory tools: fintech challenges, funds, associations, clusters. • Focus on regulatory sandboxes vs. innovation hubs (as main substitutes). • Sandboxes accept a lower number of companies compared to innovation hubs. • Example of FCA: 120 sandboxed companies vs. 56,000 firms supervised. • Average sandboxed firms 1-5. Average firms in the innovation hubs 100. • See work plan and next steps. • Time required to obtain a banking license taken as indicator of process efficiency among jurisdictions. • 50% of the jurisdictions with a sandbox have a process that takes only 1-6 months. • - FSAs with active sandboxes in place show pro-innovative attitude. Preconditions for a successful sandbox • Most pressing challenges for fintech firms trying to establish a business. • Business Type of Firms Admitted to UK Sandbox (in %, with a minimum of 1.50%)  Low transparency in sandbox entry and reporting requirements.  Lack of specific regulatory frameworks.  Case-by-case approach privileged. • National fintech vision and strategy as foundation of regulatory fintech frameworks and sandboxes. • Theme-based sandbox as possible solution to address specific national challenges. • Risk of muting innovation in fields of lesser priority despite their potential to innovate. • Beyond the fintech segments listed, 24% of FSAs identified as relevant blockchain and crowdfunding. The above finding is in line with the "Planned regulations reported". • African and Asian countries plan to adopt rules on blockchain/DLT and peerto-peer lending. - Costs of a sandbox • Number of employees in a sandbox: 3-10. • Number of employees in fintech departments: 2-30. • Having more than 10 employees in fintech departments signals a strong commitment of FSAs to fintech. • Financial market size and employee contract type not included yet in the analysis. - Fintech ecosystem • 71% of the respondents have a department or internal working group for fintech innovation. • 82% of the FSAs engage in conversations with innovators to discuss licensing matters by phone. • - Dependence on the case manager within the authority. Cooperation of regulated intermediaries with fin techs • 87% of FSAs does not grant any special regulatory advantages to fin techs partnering with licensed firms. • 85% of the surveyed FSAs does not grant special treatment when supervising cooperation. • 36% of these puts a special supervisory focus on technology risks, data protection and market integrity. • Most respondents also allow licensed companies into their sandbox. • In 16 jurisdictions licensed financial institutions can test their own fin techs in a sandbox. • Specific programs or mechanisms could facilitate cooperation. Work Plan And Next Steps - Road ahead • Identifying possible correlations by combining different factors of the survey data • Combining the survey data with desk-based research to enable more in-depth analysis - Possible factors • Measure the coverage  E.g. number of fintech firms per program (RS and IH) vs. total number of fintech firms • Focus on resources: does increasing the resources committed to sandboxes and hubs foster fintech activities in the given region?  Fintech firms admitted to any program vs. number of full-time employees committed  Fintech activity index in a given country vs. number of full-time employees committed to the programs Geographical Scope - Respondents 57. - Preliminary analysis on 43 responses. - 37% FSAs with active or proposed RS. - 43% FSAs that have an with active or proposed IH.