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UK regulator looks beyond Europe with plans for global fintech 'sandbox'

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UK regulator looks beyond Europe with plans for global fintech 'sandbox'

The U.K. financial regulator's moves to create a "global sandbox" for financial technology companies with counterparts in Asia, North America and the Middle East have been welcomed by members of the U.K. fintech community, who say it will make overseas expansion easier.

The Financial Conduct Authority said Aug. 7 that it was launching the Global Financial Innovation Network, or GFIN, a joint effort to boost collaboration between national regulators and associated organizations on fintech matters. GFIN will ease the path for fintechs looking to move between countries as they seek to scale up, according to the FCA.

GFIN includes 11 national-level regulators and other associated bodies, but does not include any participants from other European countries.

The FCA's own sandbox, which launched in 2016, is effectively a testing ground for emerging fintech companies whose business models mean that they are not regulated by existing institutions, or protected by them. Firms selected for the sandbox are able to test products and services in a controlled environment and are given advice on access to finance and guidance on implementing consumer protection safeguards. The FCA proposed a global version of the sandbox concept in February.

Tobias Taupitz, CEO and co-founder of Laka, an insurtech selling what it describes as "crowd insurance" for cyclists, said a global sandbox would smooth the process of entering new markets, which would be particularly welcome for fintechs with limited resources to devote to compliance.

"A global sandbox would mean we don't have to educate regulators over and over again. It also means that when we knock on the door in a new market that is part of the global sandbox, we can get an introduction directly to the regulator from the FCA," he said.

London-based Laka was founded in 2017 with the financial backing of insurance giant Zurich Insurance Group AG.

Taupitz added that he could not say whether the FCA had created GFIN with an eye to the Brexit process, "but what it does show is that the FCA is willing to take a leadership role in global fintech."

'Growing maturity'

Ben Brabyn, head of Level39, a London office space that aims to help fintech companies develop and expand, said in an email that the FCA's more global approach demonstrated its "commitment to working across borders and learning how other markets are approaching financial services innovation."

That so many regulators are prepared to participate in GFIN is evidence of the global fintech industry's "growing maturity," Christoper Higgins, senior relationship manager for fintech at KPMG, told S&P Global Market Intelligence.

"The GFIN and global sandbox initiative should help fintech firms access markets internationally — vital for an industry serving global financial services firms that need borderless solutions," he said in an email.

Joining the FCA in GFIN are the financial regulators of Australia, Dubai, Guernsey, Hong Kong, Singapore and the Canadian provinces of Quebec and Ontario, as well as the central bank of Bahrain, the Abu Dhabi Global Markets financial center, the U.S. Consumer Financial Protection Bureau and the Consultative Group to Assist the Poor, a partnership of organizations hosted by the World Bank. Like the FCA, financial authorities in Australia, Hong Kong, the United Arab Emirates, Singapore and Bahrain all have fintech sandboxes.

But regulators in major European economies either have been slower to adopt the concept, or have dismissed it altogether. France does not have a sandbox and, according to some reports, does not intend to have one. Spain is on the cusp of creating its own sandbox after the government published a draft law in mid-July.

BaFin, the German financial regulator, disagrees with the concept of sandboxes outright, and has no plans to launch one of its own. Felix Hufeld, president of BaFin, was quoted as saying in 2017 that "there will be no little buckets and spades" for German fintech companies. This is because all financial companies in Germany must be governed by exactly the same regulations, with no leeway for those trialing new ideas.

The view that sandboxes allow unacceptable bending of rules for fintechs is shared by the superintendent of the New York Department of Financial Services, Maria Vullo, who said in a June speech that the watchdog stands against sandboxes.

"A sandbox is where toddlers play," she said. "Adults play by rules and if you engage in banking activities, that means you are responsibly regulated in order to protect the customers. Period."