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If you are still not very clear about what a regulatory sandbox is, pay attention to the following lines. We will analyse the Spanish sandbox and the UK model, the first regulatory sandbox in the world. We will also review some success stories such as Mi Legado Digital, which has recently signed a strategic alliance withWorld Funeral Net for the digitalisation of the funeral industry.
Regulatory sandbox: definition
So, what is a regulatory sandbox? Sandbox literally means that usually delimited place where children are allowed to play freely under supervision. The concept was first transferred to the IT world to designate the isolated test environment for running new software or code safely.
The possibility of experimenting with a new project in a controlled space has proved particularly interesting for the fintech world, which encompasses all those financial companies that incorporate technological advances to offer innovative solutions to their customers.
This gave rise to the regulatory sandbox, which is the testing ground for new business models that are not yet protected by regulation and need to promote a new legal framework that protects emerging businesses under the supervision of the competent authority.
A complex regulatory framework
It should be borne in mind that the legal environment surrounding fintechs is extremely complex: they use technologies such as Artificial Intelligence, the Internet of Things, Machine Learning or Big Data that already have their own regulation; they offer innovative products or services such as the automation of decision-making or the assignment of responsibilities and obligations, which must be reviewed at a legal level to guarantee the consumers’ rights; and on top of all this, there is the financial industry’s own legislation.
Therefore, the regulatory sandbox serves to demonstrate and assess the legal viability of fintechs, guides new companies so that they do not get lost in an extremely complex regulatory framework and also alerts the different legislative authorities to the shortcomings of current regulation.
UK regulatory sandbox: a model of inspiration
The top-rated cities in terms of regulation of the fintech ecosystem are London, Abu Dhabi, Luxembourg, Mexico City and Singapore, according to a Deloitte report. London is considered the pioneer of the regulatory sandbox and the UK is one of the countries with the strongest institutional commitment to fintech.
At the end of 2015, the FCA (Financial Conduct Authority), the UK’s financial services regulator, published a report explaining, as part of its ‘Project Innovate’, why a regulatory sandbox was necessary. The proposal resulted in the launch of the first regulatory sandbox in mid-2016.
Since its launch so far, 89 firms have been accepted to test innovative products and services in the FCA’s regulatory testing environment. According to Deloitte’s analysis A journey through the FCA regulatory sandbox, all firms highlight that the sandbox has provided real value to their propositions. In addition, the ability to test new products in a live environment “increased firms’ credibility with both investors and customers”, the analysis notes.
The FCA is now considering its next steps, which include leading efforts to create a Global Financial Innovation Network and a global regulatory sandbox.
Regulatory sandbox in Spain
The regulatory sandbox in Spain began to operate after the approval of Law 7/2020 of 13 November 2020 for the digital transformation of the financial system. This was a particularly relevant development in the regulatory framework for financial innovation.
The Spanish sandbox depends on the General Secretary of the Treasury. It is the institution responsible for the system to receive applications from companies wishing to present their projects. Once the applications have been received, the Bank of Spain, the CNMV and the Department of Insurance and Pension Funds are the supervisory bodies responsible for studying and assessing them, individually or jointly, depending on the nature of each proposal.
Requirements for accessing the sandbox in Spain
There are certain requirements that companies must meet in order for their projects to access the regulatory sandbox. Some of them are:
- Provide technology-based innovation applicable to the financial system.
- Be sufficiently advanced to be tested.
- Benefit users of financial services.
- Increase the efficiency of financial institutions or markets.
- Provide mechanisms to improve financial regulation or supervision.
The first call for applications for the Spanish regulatory sandbox was resolved on 14 May. A total of 67 applications were received, of which 18 were admitted to access the controlled test space. According to the Spanish government, this first call has shown “the degree of maturity of the projects presented and makes the Spanish financial sandbox one of the most ambitious at international level”.
Among the projects admitted to access the controlled testing area, 10 will be supervised by the Bank of Spain, 4 by the National Securities and Markets Commission and 4 by the Department of Insurance and Pension Funds. The commitment to innovation is evidenced by the variety of projects admitted, covering different industries, products and services.
Second call for the Spanish regulatory sandbox
Following the success of the first edition, on 15 June the General Secretary of the Treasury published the resolution with the official rules for participation in the second call for applications for the Spanish regulatory sandbox. The process for receiving applications will be open until 23 October this year.
In order to make it easier for companies to comply with the requirements, the General Secretary of the Treasury has published a the controlled test space. This guide states that, in addition to explaining the potential benefit to users, sandbox participants are expected to set out in detail their objectives, their test systems and the technology to be used, including the entities to be involved and the risks of the project.
Sandbox success stories
Mi Legado Digital
My Legado Digital (My Digital Legacy) breaks into the traditional insurance industry with its proposal for the end-to-end digitalisation of death insurance with the application of blockchain technology and Smart contracts. Its project proposal includes innovative coverage focused on the preferences of the digital ecosystem of the new generations.
In addition, My Digital Legacy and World Funeral Net have recently signed a strategic alliance for the digitisation of the insurance industry. In addition to other joint activities, My Digital Legacy will manage its network of funeral providers through the WFN platform. Tuilli, MLD’s new product will bring the advantages of technological innovation to a new model of funeral insurance.
Equifax
Equifax, advised by the Blue Innovation team and CMS Spain, has launched its NeuroDecision Technology (NDT) project in the regulatory sandbox, a product based on Explainable Artificial Intelligence used to build credit risk models. Its market breakthrough points to the use of Machine Learning algorithms that are explainable, which makes the incorporation of Artificial Intelligence in Credit Risk management easier.
Cobertoo
Cobertoo has been another of the companies chosen in the first call of the Spanish regulatory sandbox to test the first People2People insurance for mobile devices with a completely digital contracting, management and maintenance process. Cobertoo will be supervised by the Department of Insurance and Pension Funds.
Pensumo
It is an application that allows you to save in order to complement tomorrow’s pension plan through purchases in partner establishments and challenges. Pensumo, in line with the collaborative economy, aims to establish a pillar of the pension system that complements the Social Security system, with the particularity that it is free and voluntary for the beneficiary.
