EU Report Looks Into Innovation Hubs And Regulatory Sandboxes

In recent years, governments in the European Union (EU) have launched numerous initiatives to facilitate financial innovation, including establishing so-called “innovation facilitators.” These typically take the form of innovation hubs and regulatory sandboxes.

As of January 2019, 21 EU Member States and three countries in the European Economic Area (EEA) had established innovation hubs and five EU member states have regulatory sandboxes in operation, according to a report by the European Supervisory Authorities (ESAs).

The research was mandated by the European Commission (EC) in its March 2018 Fintech Action Plan. In the report, the ESAs, which are responsible for microprudential oversight at the EU level and comprise the European Banking Authority (EBA) in London, the European Securities and Markets Authority (ESMA) in Paris, and the European Insurance and Occupational Pensions Authority (EIOPA) in Frankfurt, provide a comparative analysis of the existing innovation facilitators in the EU and identifies best practices for the design and operation of innovation facilitators.

Innovation hubs

The paper first delves into the case of innovation hubs. These provide a dedicated point of contact for companies to raise enquiries with competent authorities on fintech-related issues.

The main purpose of innovation hubs is to enhance firms’ understanding of the regulatory and supervisory expectations regarding innovative business models, products and services.

Innovation hubs in the EU include the Fintech Contact Point in Belgium, the Innovation Hub in Cyprus, the RegLab in Liechtenstein, and the Insurtech Hub in Romania.

According to the report, titled Fintech: Regulatory Sandboxes and Innovation Hubs, the first innovation hubs were established in 2014 but the majority became operational in 2016 and 2017.

Surveys conducted by the ESAs revealed three main categories of participants using the services provided by authorities through innovation hubs.

These are startups, or unlicensed entities considering entering the market for financial services, regulated entities such as credit institutions, insurance companies and payment institutions that are already supervised and considering innovative products or services, and technology providers offering technical solutions to institutions active in the financial market.

Regulatory sandboxes

The paper then moves on to regulatory sandboxes. A regulatory sandbox is a scheme that provides regulated and unregulated entities with the opportunity to test innovative products or services, business models, or delivery mechanisms, related to financial services.

The aim of a regulatory sandbox is to offer a monitored space in which authorities and firms can better understand the opportunities and risks presented by innovations and their regulatory treatment through a testing phase. It also allows regulators to assess the viability of innovative propositions, in particular in terms of their application of and their compliance with regulatory and supervisory requirements.

Jurisdictions offering regulatory sandboxes in the EU include Denmark, the Netherlands, Poland and the UK.

The ESAs then conclude with proposing several recommendations. In particular, they advise for greater cooperation and coordination between EU innovation facilitators notably through the creation of an EU network to bridge innovation facilitators established at the member state level.

An EU network of innovation facilitators could promote greater convergence and support scaling-up by providing a platform for practitioners and experts to support authorities in reaching common approaches to questions and issues on regulatory and supervisory issues.

The network could also serve as a forum among competent authorities and the ESAs to enhance financial innovation technical capacity while sharing knowledge as to the operation of innovation facilitators.