With regulatory sandboxes and other mechanisms to stoke financial industry innovation becoming increasingly widespread, the International Organization of Securities Commission (IOSCO) has published a report detailing recommendations for regulators.
The IOSCO Growth and Emerging Markets Committee launched a consultation on proposals for developing so-called “innovation facilitators,” such as regulatory sandboxes that provide testing environments for new ideas, innovation hubs and accelerators.
The report sets out recommendations for regulators in emerging markets to consider when establishing these innovation units — noting that innovation could have a bigger impact in emerging markets “due to their lack of legacy systems, combined with the potential to bring about greater financial inclusion.”
“A regulatory response to financial innovation requires a balanced approach between the potential opportunities of innovation and the risks for investors, the integrity of markets and the stability of the financial system,” said Dr. Mohammed Omran, chair of the committee and chairman of the Financial Regulatory Authority of Egypt, in a release.
“Setting up innovation facilitators is one way to facilitate the understanding of market trends, assess the need for regulatory changes or adaptation and set a strategy for the sound development of the market, with due regard to these regulatory objectives,” Omran said.
The report sets out considerations for regulators when looking at establishing an innovation facilitator and assessing what type of unit to set up.
“When establishing innovation facilitators, securities regulators and other competent authorities must consider their objectives, the scope of their regulatory framework and their available resources, as well as the ecosystem where the financial innovation is taking place,” said Lucía Buenrostro, vice-president of regulatory policy with CNBV Mexico.
“The recommendations made here contribute to the regulatory development to guarantee investors´ protection, market integrity and the stability of the financial system,” she said.
The report noted that the emergence of fintech has the potential to improve outcomes for investors “by expanding choice and lowering prices, fees and commissions; reducing transaction costs; improving transparency in products and markets; and increasing financial inclusion.”
Additionally, fintech can improve risk management, compliance and supervision. But innovation also poses new challenges for regulators, the report said, including questions about resetting the regulatory perimeter as new companies, such as big tech firms, move further into the financial sector.
The report is out for consultation until Feb. 6, 2022.