Discussion on regulatory insights and the value of regulatory sandboxes at the Singapore International FinTech Festival 2017
Featured image via Singapore FinTech Festival’s Twitter page.
At Day 2 of the Singapore FinTech Festival Conference, 3 speakers from the respective financial supervisory authorities of Singapore, Japan and Sweden had a discussion on the impact of digital technologies on their countries’ financial industries. The speakers were:
Mr. Ong Chong Tee, Deputy Managing Director, Financial Supervision, Monetary Authority of Singapore (MAS),
Mr. Motonobu Matsuo, Deputy Director General, Credit and Insurance Systems, Financial Services Authority of Japan (JFSA); and
Mr. Erik Thedéen, Director General, Finansinspektionen (Sweden’s Financial Supervisory Authority).
The session was moderated by Mr. Conan French, FinTech Advisor, IIF.
Mr. Ong began the session on regulatory insights with an overview of MAS’s view on the impact of digital technology developments for stakeholders. This includes wide-ranging benefits such as enhanced decision making, more meaningful insights and better risk management, and also the equal challenges such as legacy IT and system constraints, cybersecurity, data security and governance, change management and more.
With respect to digital developments in Japan’s financial industry, Mr. Matsuo highlighted that the country has just introduced an open API system for banks in Japan. Broadly, the regulators’ approach is to set general standards and be open to allowing new companies to enter the financial system, while keeping in mind the importance of consumer protection and data safety.
Mr. Thedéen shared that Sweden has undergone dramatic changes in how the economy operates in recent years, with people predicting that the country will be cash-free in 5 to 7 years. This movement towards digitisation is not the result of any regulatory initiatives, but the cause of a cloister effect with people influencing each other to change their practices. Although Sweden is relatively small in size, its nature of being early adaptors of innovation has created a positive environment for FinTech innovation and is now amongst the top three FinTech nations in Europe. However, Mr. Thedéen considers his regulatory organisation to be lagging in terms of digitisation opportunities and recognises a need to catch up with the changes in the industry.
Mr. Ong followed up the conversation with MAS’ initiatives to catch up with the innovations in financial services, which include establishing a data analytics group earlier this year. While MAS had been collecting and analysing a large pool of data for decades, it acknowledged a need to use the data better and is exploring technologies such as advanced algorithms, better visualisation through supervisory dashboards, more effective data analytics and the launch of a private cloud in future.
On the topic of future KYC (Know Your Customer) and AML (Anti-Money Laundering) solutions, Mr. Thedéen noted that Swedish banks had experienced severe fines as a result of AML/CFT failures and are improving their processes in this area. He also noted that the country’s legal system and regulatory system is currently not practical for regulating digital innovations such as e-wallets and needs to be brought up to speed.
Mr. Matsuo cited the example of Distributed Ledger Technology (DLT) used for KYC, whereby three mega banks in Japan have collaborated to utilise DLT technologies to build a common KYC sharing system.
In Singapore, Mr. Ong added that MAS is building an e-KYC platform using a pilot group of banks as well to share customers’ KYC data across these banks. He noted that this innovation also bears risks such as moral hazard, regulatory forbearance of who is accountable for authorising erroneous data, non-risk based reliance on the platform without human judgement, and challenges with incorporating overseas customers to the platform. Regulators and the industry must work together to solve these problems in compliance and KYC, as well as other issues such as data privacy.
With regard to virtual currencies, Mr. Thedéen called for self-regulation of Initial Coin Offerings (ICOs) and warned that any failures would be followed by regulation. Mr. Matsuo and Mr. Ong highlighted that investors must remain alert; in particular, MAS has published advisories and a new paper on its stance regarding ICOs. Notwithstanding, Ong emphasised that the developments of ICOs should be distinguished from that of DLT in general, which have greater positive uses.
The session closed with a question on how regulators and the industry can build capabilities to collaborate and adopt new technologies. Mr. Thedéen noted that there is no one-size-fits-all approach and highlighted that while Finansinspektionen does not actively promote a FinTech agenda, it is keen and willing to maintain a close dialogue with the industry on its needs. Mr. Matsuo and Mr. Ong presented a similar view on Japan and Singapore’s approaches - both pushed strongly for FinTech innovation while balancing the need for consumer protection at the same time.
Regulatory Sandbox – Colosseum or Just Child’s Play
Another interesting discussion panel on the same day was that on Regulatory Sandboxes with speakers from Thailand, Australia, the Netherlands and Abu Dhabi. The speakers were:
Mr. Buncha Manoonkunchai, Senior Director, Financial Technology Group, Bank of Thailand,
Mr. Mark Adams, Senior Executive Leader of Strategic Intelligence, Australian Securities and Investments Commission (ASIC),
Ms. Mirel ter Braak, Senior Policy Advisor Netherlands Authority for the Financial Markets; and
Mr. Richard Teng, Chief Executive Officer, Financial Services Regulatory Authority, Abu Dhabi Global Market (ADGM).
The session was moderated by Mr. Dan Morgan, Director Policy & Regulation, Innovate Finance.
Currently, there has been an explosion in the number of regulatory sandboxes - 23 and counting. The regulatory sandbox has led to market competitiveness, attracting investments, financial inclusion and market infrastructure.
Mr. Adams from Australia expressed his understanding of a regulatory sandbox as that of an environment created within a regulatory framework where concepts testing occurs. Different jurisdictions conduct their sandboxes in different ways. In Australia, there is a class waiver from some licensing requirements to allow a limited range of intermediaries and retail clients to test their models.
Ms. ter Braak said that in 2016, the Netherlands started an innovation hub at the Dutch Central Bank for incumbents and innovators. Within six months, the regulatory sandbox was established after observing the activity in the U.K. She acknowledged that there are differences across the sandboxes in terms of regulations and administrative laws. In Netherlands, they are working on a principle-based approach for the sandbox and adapt accordingly based on the progress of innovators.
Mr. Teng, representing Abu Dhabi, sees four key themes of emerging sandboxes – regulators who have not created sandbox regulation or do not license FinTech, regulators with sandbox regulation, some jurisdictions which have started a sandbox as a result of neighbouring countries’ activities, and countries without a sandbox but where FinTech is booming, such as China.
Mr. Manoonkunchai from Thailand added that sandboxes should enable the balance between innovation and regulation, and promote risk management and consumer protection. The sandbox in Thailand is a collaborative model where regulators want to be more proactive, and learn and work together with innovators.
There was a general agreement among the speakers that the regulatory sandbox is just part of the picture. Mr. Adams mentioned that the sandbox gives informal assistance to startups and flexibility in applying regulations through informing and understanding the framework. The sandbox also promotes consumer protection, market integrity, efficiencies which drives innovation.
In the Middle East, Abu Dhabi is ranked as the top FinTech hub. Mr. Teng highlighted the factors that motivated Abu Dhabi’s regulatory sandbox – to help connect people and to address differences. Abu Dhabi has a relatively young financial sector and with an increasing population of 1.3 billion. With 86% of the population who are unbanked, innovation is a goal. At the same time, the SME community makes up 60% of the economy and yet, makes up only 4% of financial services loan book. This all translates into demand for financial services and presents a huge opportunity.
Mr. Manoonkunchai said that there is no one market which can work alone. Richard cited the example of Singapore and the MAS, which has introduced bilateral protocols and bridges to create bigger markets for FinTech players. Mr. Adams added that there are talks between the U.K. and Australia on a FinTech bridge through information sharing.
The question on the standards in FinTech was raised. Mr. Adams identified two types of standards – regulatory standards and technology or service standards. On the regulatory end, the essential elements of a sandbox on the international level and the provisions of consumer protection need to be identified.
Technology standards should be set by the industry rather than by the regulators. Mr. Teng mentioned that international standards will require time as every jurisdiction has its own objectives and differences.
Even though it may be too early to tell if the regulatory sandbox is successful, Mr. Teng believes that successful FinTechs passing through any sandbox are those that scale quickly, are able to provide the market with financial inclusion and solve problems.