July 4, 2016
Financial industry authorities caught some sort of a fever in 2016 with regulatory sandboxes launched around the world. The trend demonstrates openness and the forward-thinking attitude of the governments in terms of innovation implementation. A great contribution to economies, regulatory sandboxes are also a fantastic opportunity for startups to get a jump-start in international markets without carrying a heavy burden of compliance.
Just like there are good reasons startups should be joining FinTech accelerators/incubators, there are even weightier reasons to consider joining a regulatory sandbox. Among the authorities that have invested efforts in launching regulatory sandboxes are FCA, ASIC and MAS. With the launch of the regulatory sandboxes, authorities brought up important benefits for the startup community and the financial services industry.
FCA bought up an estimation that time-to-market can be increased by about a third in this way, at a cost of about 8% of product lifetime revenue. The authority points out that the regulatory uncertainty disproportionately affects first-movers and discourages innovators.
MAS believes that a regulatory sandbox approach can be used to carve out a safe and conducive space to experiment with FinTech solutions, and where the consequences of failure can be contained. The Sandbox cannot remove all risks, as failure is an inherent characteristic of innovation. In this regard, the Sandbox aims to provide an environment where if an experiment fails, its impact on consumers and on financial stability will be limited.
The startup ecosystem is heavily reliant on investments to facilitate the growth. In ecosystems with regulatory uncertainty, startups may face certain difficulties in raising funds and achieving lower valuations as investors try to factor in risks that they are not well-placed to assess.
Estimations from other industries brought up by FCA suggest that valuations may be reduced by ~15% due to regulatory uncertainty.
In addition to shrinking valuations and creating obstacles to raise early-stage funding, innovative solutions may not get a chance to reach the market and being tested. Sandboxes enable firms to manage regulatory risks during the testing stage so that innovative solutions may be trialed and later potentially introduced to the market.
Another important benefit is a regulatory relief, as ASIC emphasizes.
We will generally grant relief from an obligation where there is a net regulatory benefit, or the regulatory detriment of relief is minimal and clearly outweighed by the commercial benefit.
In some situations, we issue ‘no-action letters’ which indicate that we will not take action in relation to a breach of the law. Regulatory Guide 108 No-action letters (RG 108) sets out when we will provide a no-action letter.
Compliance in the financial services industry can be a destructive (and for startups even a fatal) power. Given that large financial institutions are occasionally being fined by regulatory authorities for financial misconduct or lack of oversight/risk-management practices, for newcomers, it's especially important to be well-prepared to avoid future difficulties.
Moreover, the regulatory environment has a tendency to evolve and requires workforce and financial investments to keep up with. Sandboxes can serve as launch pads for safe testing within legal barriers but free from burden and investments.
Since regulatory sandboxes provide a chance to test the solution, they allow to pivot the end-result until the best solution for customers is reached. Given that any test and pivot of the product comes with time and money expenditures, with sandboxes startups get a chance to develop the best possible solution with reduced costs and risks.