Regulatory sandboxes usually focus on financial regulations. However, these are not the only obstacle holding back innovative fintech start-ups. More extensive sandbox solutions that also cover data protection issues could make Poland a pioneer on the attractive global market supporting fintech.
Regulatory sandboxes: theory and practice
Since the UK’s Financial Conduct Authority set up its sandbox, regulatory sandboxes have come to symbolise regulators’ support for development of financial innovation. Many other countries have followed suit, having realised the growing role of fintech in the financial sector and the economy as a whole.
The term “regulatory sandbox” can mean many things, and comprise a variety of solutions. Very often fintech start-ups do not actually receive more lenient regulatory treatment, for a number of reasons. In the EU, one reason is that the member states are bound by EU law and have limited scope to modify the law for certain market players.
Despite this, the financial supervisory authorities might have a lot to offer to innovative start-ups. Entry into a direct but informal dialogue with a regulatory authority can be extremely valuable. This can help clarify how an innovative service or product can be incorporated into the existing regulatory framework. In some countries, this has been possible for many years, regardless of regulatory sandbox schemes or innovation hubs.
The main advantage of solutions of this kind, and of general openness of regulatory authorities, is that they reduce the regulatory uncertainty quite typical in fintech. Legal uncertainty is very often painful, and can sometimes have fatal consequences, as financial sector regulations are complex and change rapidly. At the same time, many of these regulations are outdated. Quite often they are also designed for large firms that find it easier to meet the rigorous regulatory criteria, and for their stable business models. On the other hand, innovations like blockchain or AI raise some truly fundamental regulatory questions, and it is difficult to introduce products or services based on these innovations on the market due to regulatory reasons.
Sandbox solutions may be an ideal means of reducing regulatory uncertainty. This is even more effective when dialogue with market players goes hand in hand with general transparency of the actions of the financial regulator and an open attitude towards the market. This manifests itself in communication of information about regulatory strategy and plans, not taking the market by surprise with sudden decisions, publication of informative materials, holding public consultations, etc. In addition to increasing regulatory certainty, measures of this kind also help to build trust between regulatory authorities and the market.
Support for fintech does not necessarily mean neglect of other, traditional goals of financial regulation, such as stability of the financial system and protection of investors, although there are certain tensions in this regard that have to be taken into account.
Polish sandbox
Regulatory sandboxes have been a topic of discussion in Poland for some time as well. The first discussions on the subject were held in 2016, when the first regulatory sandbox in the world, in the UK, was just beginning to operate. Today there is every indication that at least with regard to the fundamental issues, the Polish regulatory sandbox will start up soon. For the moment, the Polish Financial Supervision Authority (KNF) Innovation Hub scheme has been in operation for several months. This is a scheme for dialogue between the regulator and the fintech sector. Considering the potential of fintech in Poland, which the government also sees, this is certainly a step in the right direction.
A broader approach is needed
One of the characteristics of regulatory sandboxes is that they are planned and organised by financial regulatory authorities in individual countries. This is normal, because these are the authorities responsible among other things for issuing the relevant licences and oversight of firms on the financial market.
At the same time, innovative financial products and services face various regulatory barriers and legal uncertainty. This is true not only with regard to financial regulations. Depending on the case, doubts may arise in other areas as well.
A great example is data protection laws. Since the EU’s General Data Protection Regulation came into force, fintech start-ups aiming to process personal data—often an important part of their business model—can expect a number of legal obstacles. In this regard, the regulatory framework is exceptionally complex. Data protection laws overlap with other information protection areas such as banking secrecy.
Another example is consumer protection laws. It may occur that a given fintech start-up is not subject to KNF oversight even if it operates in the financial sector in the broad sense. However, if it interacts with consumers, it must usually meet consumer law requirements.
Thus, a purely financial regulatory sandbox may not be enough. It might only resolve a select group of regulatory issues—although often the most important ones. There are also some other problems that might be equally important for a fintech start-up. Separate regulatory sandboxes operated by the Personal Data Protection Office (UODO), or for example the Office of Competition and Consumer Protection (UOKiK), might not necessarily be the ideal solution. If these authorities worked closely with the KNF, so that the regulatory sandbox was more comprehensive, this could produce true synergy.
This would be a globally unique approach. The possibility of dialogue with the relevant public authority not only on issues strictly concerning financial regulations and permits to operate on the financial market but other crucial issues as well, for example, personal data issues, could give Poland a competitive edge in the global fintech race.
Jacek Czarnecki