Early Lessons on Regulatory Innovation to Enable Inclusive FinTech: Innovation Offices, Regulatory Sandboxes and RegTech

Abstract

Technology-enabled innovation in financial services (FinTech) can extend the benefits of financial inclusion to millions of unbanked and underbanked people around the world. However, the rise of FinTech presents many regulatory challenges - for emerging and developing economies in particular. Consequently a number of regulators in advanced, emerging, and developing economies have responded to such challenges by innovating on their own. These innovative regulatory initiatives include innovation offices, regulatory sandboxes, and RegTech for regulators. Against this backdrop, the Early Lessons on Regulatory Innovations to Enable Inclusive FinTech Report aims to provide readers with key insights on how regulators are innovating to better respond to financial innovation. This empirical study provides independent and comprehensive insights on the inter-relationships between financial and regulatory innovation and financial inclusion, together with lessons learned from early examples of regulatory innovation. The report also provides practical considerations for those regulators seeking to develop their own initiatives. This report has been produced by the Cambridge Centre for Alternative Finance at Cambridge Judge Business School in partnership with the FinTech Working Group of the United Nations Secretary-General's Special Advocate for Inclusive Finance for Development (UNSGSA). It would not have been possible without the support of the Monetary Authority of Singapore (MAS) and the supervision and coordination of the Office of the UNSGSA. Global interest in innovative regulatory initiatives is strong, with regulatory sandboxes now live or planned in over 50 jurisdictions. There are also innovation offices in operation in over 30 jurisdictions, while 20 jurisdictions are pioneering RegTech models. Some jurisdictions have established innovation offices as a first step in the regulatory innovation journey. They are a particularly compelling initial option for capacity-constrained regulators in emerging and developing economies. They require no protracted changes to legislation or regulation, or related resource implications. Key lessons learned from innovation offices underscore the importance of early, and close, engagement with innovators. Executive buy-in and inter-agency coordination can ensure their effective functioning, and they can be a powerful support to regulators with a financial inclusion remit. Innovation offices are also only as good as the quality of their resources, such as the technical capacity of their staff. Regulatory sandboxes have been widely adopted as an innovative regulatory initiative, including several with a specific financial inclusion focus. Sandboxes can help regulators gain a better understanding of FinTech and develop evidence-based regulations that promote inclusive FinTech. Key lessons learned from early regulatory sandboxes highlight that they are neither necessary nor sufficient for promoting financial inclusion. Sandboxes do offer benefits but are complex to set up and costly to run. Experience shows that most regulatory questions raised in connection with sandbox tests can be effectively resolved without a live testing environment. Similar results may be more affordably achieved through innovation offices and other tools. RegTech (regulatory technology) is a distinct innovative regulatory initiative, which focuses on how to monitor and enforce compliance against relevant regulations. RegTech can support a more responsible delivery of innovative financial services, which may directly impact financial inclusion. It also allows regulators to swiftly respond to market developments, better protect consumers, and enhance institutional supervision. There are currently limited examples of RegTech solutions being deployed in emerging and developing economies. Lessons learned from initiatives that do exist highlight the merits of beginning with a problem that will likely gain broad support and has a high likelihood of successful resolution. Crowdsourcing potential solutions to regulatory problems, paired with strong executive sponsorship, has also proven rewarding. Finally, multi-disciplinary teams with complementary skill sets can help foster long-term regulatory transformation. It is clear that no single initiative is a silver bullet for effective regulation. Many are resource intensive and require careful cost-benefit analysis. However there are a number of considerations for regulators who do seek to implement their own innovative regulatory initiatives. An internal mindset and culture which is supportive of innovation within the regulator is crucial, while direct engagement between regulators and innovators has also proven to be mutually beneficial, regardless of the form which this takes. Regulators have also benefited from close inter-agency collaboration and opportunities for mutual learning. Regulators in emerging and developing economies need to remain agile and open as they innovate and create regulatory initiatives. When effectively carried out, innovative regulatory initiatives enable inclusive FinTech and support regulators in long-term capacity building.