INV #Fintech, the sister accelerator to #Bank Innovation, announced a partnership today with the Berlin-based #Open Bank #Project to provide #sandbox and development services to the startup and its 13 partner companies. The sandbox will #offer startups in the INV Fintech accelerator a secure digital space to access and incorporate bank data into their applications. […]
Bank Innovation
The #Hong Kong Monetary Authority (HKMA) this week launched its #FinTech Supervisory #Sandbox (Sandbox) to facilitate the pilot trials of FinTech and other #technology initiatives by #banks before they are launched on a larger scale. This is a positive development for Hong Kong’s FinTech and financial services industries.
Here are 10 things you need to know about the Sandbox:
1. Goal
The HKMA wants to provide a supervisory arrangement that gives greater flexibility to banks to test new initiatives before their formal launch. The goal is to gather real-life data and user feedback in a controlled environment. This can apply to any initiative from biometric authentication and #blockchain to robotics and augmented reality.
2. Benefit
The Sandbox allows a bank to test a new initiative without the need to achieve full compliance with the HKMA’s usual supervisory requirements during the test period (e.g. security-related requirements for electronic banking services).
3. Scope
The Sandbox will be available to Fintech as well as other technology initiatives intended to be launched by banks.
4. Boundaries
The HKMA requires that clear definitions be set-up on the scope and phases (if any) of the trial (e.g., size and types of customers involved, technologies and types of banking services covered), the timing and the termination arrangements.
5. Participants
The Sandbox will allow banks to conduct pilots involving actual banking services and a limited number of participating customers (e.g. staff members, customer focus groups).
6. Customer Protection
Adequate measures need to be put in place to protect customers during the trial. These should generally include a proper process for selecting customers who understand the associated risks and voluntarily want to join the trial, an enhanced complaint handling procedure, a mechanism for timely and fair compensation of customers’ financial losses caused by any failures of the trial, and appropriate arrangements for customers to withdraw from the trial.
7. Risk Management
The HKMA requires that reasonable compensating controls be implemented to address the risks posed by the trial on the bank and customers as well as to mitigate the risks arising from the exemption from full compliance with the supervisory requirements.
8. Active Monitoring
Any trial needs to be subject to close monitoring so that the bank can promptly identify and handle any significant problems or incidents that may arise.
9. Flexibility
The HKMA does not intend to stipulate an exhaustive list of supervisory requirements that may potentially be relaxed within the Sandbox. As this is a new supervisory arrangement, the HKMA will refine the arrangement over time in the light of implementation experience and industry development.
10. Contacting the HKMA
Banks intending to use the Sandbox should get in touch with the HKMA beforehand to discuss the appropriate supervisory flexibility that can be made available to them within the Sandbox.
The HKMA’s announcement of the Sandbox can be found here and the speech by the HKMA’s Chief Executive Norman Chan announcing the Sandbox here.
Feel free to contact me via LinkedIn for any FinTech related matters. For media inquiries or speaking engagement requests, please contact [email protected]
Yours in FinTech,
Henri Arslanian
***Henri Arslanian is an Adjunct Associate Professor at Hong Kong University where he teaches graduate courses on Entrepreneurship in Finance as well as the first FinTech course in Asia. His upcoming book on Entrepreneurship in Finance will be published in late 2016 by Palgrave Macmillan.
A member of the Milken Institute’s Young Leaders Circle, Henri is a regular speaker globally on the topic of FinTech and hedge funds to various audiences, ranging from TEDx to Fortune 500 management teams. He currently sits on a number of other finance, academic, civil society, and FinTech related boards and advisory committees, including the HKSFA FinTech Committee and the Hong Kong FSDC FinTech Project team.
Henri was recently with a FinTech start-up and previously spent many years with UBS Investment Bank in Hong Kong. He started his career as a financial markets and funds lawyer in Canada and Hong Kong.
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With poetic license and my apologies to Shakespeare and his fans.
“…2nd Regulator:
By the pricking of my brains,
Something delightful this way comes [Knocking] Open Locks
Whoever knocks!
[Enter #Fintech/Finserv Stakeholders]
Fintech/Finserv Stakeholders:
How now, you secret, black, and midnight lord!
What is’t we can all do?&8230;”
Something indeed delightful this way is coming. Something that could become essential to the financial services industry, to fintech. Something that is materializing thanks to the keen insights and ground breaking intent of the Financial Conduct Authority (FCA) – the United Kingdom&8217;s financial regulator. That something is the FCA&8217;s regulatory #sandbox (the Sandbox), which is the very first experimentation of its kind.
To date, regulation has been a top down affair, with either legislative fiat or regulatory fiat brought down to the industry. Some will argue that the industry is usually consulted at the regulatory or legislative level. Some will even argue that lobbies meddle and influence legislative or regulatory fiat. They will be correct. Yet, this does not mean these feedback loops that help shape financial services regulation are bottoms up in their approach. Incumbents or lobbies represent an industry do not talk for the base, for innovators, disruptors. I view the FCA&8217;s Sandbox initiative as the first bottom up approach to regulation.
Indeed the stated goals and benefits of such an endeavor are impressive:
for startups and incumbents the potential benefits are =>
&8211; to lower the barrier and costs to testing and experimenting with a regulatory framework
&8211; to lower the risk of misinterpreting existing regulation
&8211; to receive tailored regulatory guidance
&8211; to receive temporary waivers, &8220;no enforcement action&8221; letters in order to test a business model or #technology live
&8211; to build a more optimal path towards compliance and regulatory approval
for a regulator the potential benefits are =>
&8211; to get educated as to innovation, new technologies and new business models
&8211; to optimize market structure
&8211; to protect consumers
&8211; to inform and shape future regulation
&8211; to modernize their own operations
&8211; to promote healthy competition
&8211; to encourage innovation
I wonder if #bitcoin and the bitcoin #blockchain early days and development would have been altered, for the better, had there been a tier one sponsored Sandbox where startups, hackers and incumbents would have been able to experiment and share with regulators.
Now that the FCA is embarking on this Sandbox journey, what next?
I expect regulatory wisdom and foresight to spread by osmosis. From what I understand the Monetary Authority of Singapore (MAS) is working on a similar scheme, unsurprisingly. In the United States, the Office of the Comptroller of the Currency (OCC) which regulates banking, is working on its own project. So is the Federal Depositary Insurance Corporation (FDIC). I know of no other project in the works, which does not mean regulatory brains are not in neuron overdrive at this very moment. Thusly I expect sandboxes to crop up all over the world. How these sandboxes will be architected and how they may, or may not, interact with one another will be fascinating to witness.
These twin &8220;How&8221; questions force us to take a closer look at the FCA. Why was the FCA first to market? What makes the FCA so special?
The FCA is one of the most sophisticated and respected regulators in the world. It rules over one time zone and an industry/economy/eco-system essentially centered around the greater London area. What is a Sandbox if not a platform for constant and incremental testing! The FCA is also a very independent regulatory body &8211; one may say one of the most independent body in the world, unencumbered by political interference. The FCA does not suffer from a proliferation of regulatory competition in the UK as it stands alone with the Prudential Regulatory Authority (PRA). Finally, the FCA is, from what I can gather, an organization that is guided by &8220;philosophical&8221; tenets. This latter point is essential to understand as it allows the FCA to be a pragmatic caretaker of financial regulation that is opened to a/b testing and experimentation.
Let&8217;s take the United States as a counter example &8211; and I will leave aside philosophical arguments centered around market solutions vs government solutions, libertarianism vs central action. The USA financial services industry &8220;suffers&8221; from a very complex regulatory landscape: 50 state examiners for the insurance industry, 50 state bank regulators, the FDIC, the OCC, the Treasury, the Fed, the SEC, the CFTC, FINRA (yes I like to joke around), FinCen (within the Treasury), the CFPB to name but the main ones. These various agencies sometimes overlap and often &8220;compete&8221; against one another which creates either areas of confusion and misunderstanding or gaps where no regulatory clarity exists. There are four time zones (not counting Alaska and Hawaii) and more than one metro geography (NY, Chicago, San Francisco, LA, Boston, Washington DC, Seattle&8230;) that matter. Some will argue that political interference indeed occurs with various regulatory bodies (think of how a new administration impacts how the SEC behaves for example). Finally, main US regulators are guided by &8220;rules&8221; which does not allow them easily to experiment and tinker like the FCA does.
Absent the benefits derived from what defines the FCA, what would be the right architecture for a Sandbox, one that would ensure optimal results? I believe a Sandbox would need to incorporate a) a strong strand of &8220;innovation management&8221; DNA, b) a level of neutrality to ensure collaboration among all stakeholders (between regulatory bodies and between regulators and the industry), c) a level of independence to make sure profit or special interests do not hijack the overall mission and d) a deep and broad sophistication around various subject matters (regulation, legal, technology, financial services business models, startups, innovation).
This translates succinctly into a not-for-profit organization with a stable sponsorship base and an inclusive yet independent governance framework.
Now, picture a universe of Sandboxes, some like the FCA, some independent not-for-profit organizations. Some focused on one country, others focused on a group of countries. A US Sandbox, a LATAM Sandbox, a Brazil Sandbox, the UK Sandbox, a EU Sandbox, a Western Africa Sandbox, an Eastern Africa Sandbox, a South East Asia Sandbox, a China Sandbox&8230;
Further, picture Sandbox cooperation, bilateral, multilateral, thereby creating a bottoms up #network that would foster innovation, market structure optimization and financial inclusion by taking account of grass root technology and business models advances from startups, developers and incumbents. I know I am dreaming but, playing the FCA chess game several moves ahead I do not think such a vision is that far fetched, although the details when implemented may vary from my current crude vision.
Do remember that we do have top down multilateral cooperation around financial services regulation either at the State/Government level or international organization level. Why not multilateral cooperation from the bottoms up too, via Sandboxes, as powerful tools to augment the interplay between innovation and regulation?
ps: I enjoyed using as &8220;props&8221; both Shakespeare&8217;s Macbeth and an allusion to a movie about Mark Zuckerberg and Facebook. The supernatural phenomena that is Regulation and the omnipotent traits shared by a regulator and Zuckerberg will not have escaped readers.
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