Digitalisation, mobile, automation, robotics, distributed ledgers, big data, analytics, API, UX; the list could (and will) keep growing.
Suffice to say, technology, and technological developments, are playing an increasingly significant role in how financial services are structured, managed and delivered to customers, resulting in a world in which industry demarcations are becoming blurred, and incumbent financial institutions, data rich technology companies and fintech startups alike are being forced to innovate, collaborate and disrupt at an ever faster pace.
Some technological innovation within the broader fintech space will not require regulation. But much will, and there is an undoubted tension and challenge in ensuring that innovations which provide customers with easily accessible, digitised, interoperable services, and which can ultimately drive down customer cost, do not disproportionately increase customer or systemic risk.
Where a fintech business falls within the regulated space, it will be prohibited from providing its services in the EU unless it is authorised by the relevant financial services regulatory authority in one of the EU member states (in Ireland’s case, the Central Bank of Ireland).
EU passport
The authorisation process is can be time consuming and expensive (and in the case of startups, prohibitively so), and requires full testing of the product against regulatory requirements in advance of submitting an application, which can deter firms from pursuing innovative products and solutions, or add significantly to the time to market in circumstances where the market may already be moving forward.
The benefits, of course, are an EU wide passport for the authorised product or service.
Over the past number of years, in a move to counter some of the challenges posed to innovation by the authorisation, several countries have implemented regulatory ‘sandboxes’, an approach which is both encouraging the growth of the fintech and giving their supervisory authorities a much more sophisticated understanding of the changing nature of financial services and firms.
In essence, the concept of a regulatory sandbox is one of a controlled environment in which firms are permitted to ‘live’ test innovations, for a defined period of time, with a ‘relaxation’ of some of the regulatory requirements to which the firms would otherwise be subject, prior to them entering the market.
Relaxing the rules does not imply anything nefarious, but simply that certain requirements, such as mandatory paid-up capital requirements, board composition and track record, can be relaxed for the period the technology or product is in the sandbox.
Risk and security
Importantly, however, requirements in relation to security and confidentiality of customer data, fitness and probity criteria and anti-money laundering rules would not be affected and must be maintained, and any customers who are part of the sandbox experience must be given, and understand, clear risk disclosures.
However, by relaxing even some of the strict requirements, a sandbox regime can speed up authorisation times significantly, provide firms with the opportunity to test their ideas prior to engaging in an often lengthy authorisation process, give them time to raise capital with a ‘proof of concept’ working product or technology, and enable consumers to enjoy more and improved financial products and services.
The Irish Government has committed, in its ‘IFS 2020: A Strategy for Ireland’s International Financial Services Sector 2015-2020’, to strengthening and growing Ireland as a global fintech hub, a commitment which is emphasised in the 2017 IFS 2020 Action Plan.
While it is clear that the aim is to foster an environment in Ireland in which both indigenous and multinational fintech companies can thrive, particularly in terms of investment and jobs, the introduction of a regulatory sandbox regime has not, so far, been mooted officially.
If Ireland is, however, serious about becoming a fintech hub, such a regime should be considered sooner rather than later, particularly at a time when there may be opportunities in the regulated fintech space arising from Brexit which the country may otherwise miss.
This article first appeared in Business and Finance on 17 August 2017