European financial regulators are planning to study the use of regulatory sandboxes to encourage the development of financial technology (fintech) firms mid concerns about regulatory arbitrage and the lack of a level playing field.
The European Banking Authority (EBA) published a discussion paper on Friday setting out its work so far on the emerging fintech sector. The EBA says it's "stepping up" its work on fintech-related issues "to investigate the impact of fintech on the financial system and its regulation and supervision."
The EBA identify several areas in the paper in which regulators intend to do further work, including the use of regulatory sandboxes and innovation hubs to facilitate fintech; consumer protection; anti-money laundering; and the impact of fintech on prudential and operational risks.
Over the past couple of years, an increasing number of regulators have been introducing "sandboxes" that allow fintech and other firms to test novel products and services in a limited environment, without complying with traditional licensing requirements. However, the EBA notes that this different regulatory treatment for fintech firms "could potentially lead to level playing field issues and forum shopping."
The EBA also wants to investigate whether the use of sandboxes, "including the waiving of particular requirements and the eligibility of particular entities to be included in the sandbox," are in line with existing European rules.
The EBA also plans to investigate a variety of potential consumer protection issues that may arise due to technological innovation including how the uncertain regulatory status of many fintech firms impacts consumer rights; cross-border oversight issues; unsuitable or non-existent complaints handling procedures; disclosure issues; and the heightened risk of financial exclusion due to the application of artificial intelligence and algorithms that could facilitate discrimination.
Comments on the paper are due by Nov. 6. The EBA is planning to hold a public hearing on some of these issues on Oct. 4.
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