An innovation hub for the regulation of financial technology products is set to be established by the South African Reserve Bank and the Financial Services Conduct Authority in the first half of 2020. The hub will include a regulatory sandbox.
For those who have missed the clamour, a regulatory sandbox is a live testing environment for innovations that fall outside of, or present challenges to, existing regulatory frameworks. The sandbox allows the innovation to operate under supervision. Ultimately, the goal is to ensure that subsequent regulation (including self-regulation) facilitates innovation while mitigating risks for the consumer.
Outside of the more well-documented potential advantages of regulatory sandboxes, such as reducing uncertainty as well as the costs of innovation, is their potential to enhance evidence-based policy-making and lessen the weight of rudimentary debates about “more or less” regulation and heighten nuanced discussion about policy details that places more emphasis on good and bad regulation.
The regulatory sandbox is the “newish” shiny toy for financial regulators then for good reason, and those who have one brag about it; those who don’t are speedily building one. The UNSGSA’s Fintech Working Group reports that as recently as 2015 the Financial Conduct Authority in the UK was the only one to have one, and as of 2019 there were more than 50 jurisdictions who were either implementing or exploring the idea.
Although the sandbox has become synonymous with the financial industry, approaches like it were used first in industries outside of financial services. Mark Walport, who pioneered the concept in the UK, took his cue from clinical trials in the healthcare industry.
There does not appear to be good reason why this policy tool should remain in the arsenal of fintech regulators only. In Singapore, the Energy Market Authority introduced a regulatory sandbox framework to support energy innovations. Australia introduced a broad sandbox initiative covering blockchain, energy, health, agriculture and social innovations.
Complexity
Increased complexity of business models should give regulators pause for thought that there is a need for a cross-cutting approach to regulatory development. Jeff Berman, the former head of policy at MySpace, wrote recently that “in the mid-2000s, when I served as MySpace’s head of policy, the problems tech platforms faced were quaint by today’s standards”. And, by example, Facebook is a social media network, a publisher, an e-commerce platform and soon a crypto-payment platform. This increased complexity means disruption is likely to occur in a wider range of areas that move beyond the mandate of one regulatory authority or department.
This is not confined to large global enterprises — even the local entrepreneurial space includes players working on such innovations as blockchain land registries, which potentially intersect fintech, legaltech and agritech. Other sizeable markets that intersect with fintech include real eastate (proptech) and healthcare (healthtech).
So what? Well typically, companies included in a fintech programme do not enjoy exemptions from other laws. While playing in a sandbox should not imply the absence of any regulation whatsoever, it is true that regulations do not operate in isolation from one another. And there will be many instances in which regulators should be monitoring how the interaction of different legal regimes impacts the operations of a company and the services it renders to consumers.
The options available include creating a broad sandbox where there can be joint regulatory oversight, where an innovation touches the mandate of more than one regulatory agency, or separate sandboxes can be established with mechanisms to ensure regulators talk to each other.
There is no doubt, however, that globally the sandbox already has its sceptics. Arguably one of the more salient concerns is that they might delay progress by prolonging the amount of time that it takes for emerging technologies to be covered by a regulatory regime. Such critics tend to make the point that there is broad support for the idea that regulation be technology neutral, and that sandboxes are therefore not necessary because in many cases we can extend existing regulations to new ways of doing the same economic activity. Tech neutrality places focus on the underlying economic activity, and in many cases a new technology does not change that.
Brad Greenberg provides reasons to be sceptical in the article Rethinking Technology Neutrality (PDF). One of the issues he raises is the “problem of the penumbra” — and how this leads to under- and over-inclusiveness. He demonstrates this by referring to HLA Hart’s canonical illustration — say, for example, “a legal rule forbids you to take a vehicle into the public park. Plainly this forbids an automobile, but what about bicycles, roller-skates, toy automobiles? What about aeroplanes? Are these, as we say, to be called ‘vehicles’ for the purpose of the rule or not?” He goes on to illustrate that “as technology advances, that definition changes and new ‘vehicles’ fall into the law’s penumbra of uncertainty. (For example, is a Segway a vehicle? What about a drone? Does it matter if the drone carries only a camera for surveillance or if it is delivering beer?) In contrast, a technology specific law – for example, No Skateboards — is less prone to penumbral enlargement.”
Mindfully
This is not the article to fully explore technology neutrality, but it is difficult to argue that rules which pre-date emerging technologies are neutral in practice when they can require paper-based disclosures or the need for a physical presence. Regulatory sandboxes, particularly when they exist for multiple markets, are at least then a means to keep an eye on the problem of the penumbra and to ensure that new technologies are brought under the appropriate regulatory regime mindfully as opposed to by the default extension of existing rules.
Admittedly as a relatively recent phenomena, there is not enough evidence yet to be sure what the effects of sandboxes on innovation and tech inclusion will be, but there seems to be more reasons to add them to the policy toolbox than not. Since their arrival, they have started (though slowly) to appear in areas beyond fintech. South African policy-makers might want to consider starting where others have taken a few years to arrive at.
- Gwen Ngwenya is a public policy expert working on innovating the public policy process for emerging technologies and is founder and CEO of Techpol