The UK's Financial Conduct Authority (FCA) has announced the launch of the Global Financial Innovation Network (GFIN), an association of 29 regulatory bodies (Members) which will cooperate to promote innovation and share experiences and approaches to supervising new technologies in the financial services sector.
The proposal to launch the GFIN was set out in a consultation paper in August 2018, and has received strong industry support. A key GFIN initiative is a pilot scheme allowing firms to test innovative products, services or business models across more than one jurisdiction – referred to by the FCA as a "global sandbox".
We summarise below some of the key elements of the GFIN and the practical opportunities for firms under this initiative.
Role and structure of the GFIN
The GFIN comprises a broad demographic of Members from various regions, including regulators in key financial hubs such as the FCA, the Monetary Authority of Singapore (MAS), the Hong Kong Monetary Authority (HKMA) and the Hong Kong Securities and Futures Commission (SFC).
Under the finalised GFIN Terms of Reference, the network's objective is to act as a collaborative knowledge-sharing initiative aimed at promoting innovation in financial services with a view to advancing financial integrity, consumer wellbeing and protection, financial inclusion, competition and financial stability.
The three primary functions of the GFIN are, in summary:
- to collaborate and share experiences of innovation, and to provide regulatory contact information for firms;
- to provide a forum for joint work and collaboration on RegTech (the development of new technologies to facilitate the delivery of regulatory requirements), as well as issues such as e-KYC (electronic know-your-customer checks), data privacy and financial inclusion; and
- to allow firms to trial cross-border solutions.
Responsibility for oversight and strategic direction of the GFIN will lie with a Coordination Group comprising a sub-set of Members. Certain bodies, including (among others) supranational and intergovernmental bodies, will be permitted to participate in GFIN activities as observers. Firms or organisations wishing to participate in cross-border testing, and private and for-profit institutions, will not be permitted to participate in the governance or operations of the GFIN.
The cross-border testing scheme, conceptualised by the FCA as a "global sandbox" in the 2018 consultation paper, will be made available by participating Members. In essence, a sandbox provides an environment for firms to test their business model subject to restrictions on their activities, but without the full regulatory burden they would ordinarily be subject to. The GFIN testing scheme will allow firms to trial and scale new technologies in multiple jurisdictions simultaneously. Currently, 17 Members (including, among others, the FCA, MAS, HKMA and SFC) have confirmed their participation.
The GFIN has now opened a one-month application period for firms wishing to participate in pilot testing of the scheme. Interested firms must submit their application to relevant participating Members by 28 February 2019. Pilot tests are then expected to run from Q2 2019 for a six-month period, unless Members agree to extend them.
Given the different regulatory standards across Members, an applicant firm must meet the individual application requirements (including eligibility criteria) of each jurisdiction where it wishes to test. Each Member will evaluate an application on the basis of its own standards and assessment of the risks involved, although Members are all expected to ensure that the testing maintains high standards of consumer protection and market integrity.
A single Member may act as the applicant firm's initial point of contact. That Member will be responsible for ensuring that the application is complete and provides sufficient information for all participating Members to assess the application. If another Member believes that the application contains insufficient information to be evaluated, the Member who initially received the application must request additional information.
This pilot will function as a trial for both Members and participating firms, and experiences gained in the pilot may allow for fine-tuning of the scheme over time. This may eventually lead to a streamlined process with harmonised applications across Members, although the FCA stresses that this would only be a longer-term possibility.
Practical considerations for firms
The pilot of the GFIN cross-border testing scheme presents a valuable opportunity for eligible firms to test their business models in multiple jurisdictions without undergoing the onerous regulatory process which may ordinarily apply when commencing business in those jurisdictions, such as applying for a full licence from the local regulator. However, given that Members will impose restrictions on the activities of scheme participants, firms will need to make a holistic assessment as to whether the scheme would offer the most appropriate means of market access (for example, firms that are appropriately resourced may prefer to directly apply for full licenses in relevant jurisdictions).
Firms wishing to participate in the pilot will need to prepare an application promptly to meet the 28 February submission deadline. For the purpose of identifying the Members to whom the application is to be made, the applicant will need to first undertake an analysis of whether its proposed activities will, in each case, fall within the scope of the regulatory framework administered by the relevant Member.
Based on the application form provided by the FCA, information which Members expect applicants to provide may include:
- basic corporate details of the applicant (name, legal entity registration, industry sector, etc.) and information on whether the applicant is already active, and if so, whether its activities are regulated;
- an indication of the jurisdictions in which the applicant wishes to test its activities;
- a description of the applicant's business model, its stage of development and why it is innovative;
- an explanation of how the applicant's business model benefits consumers;
- an assessment of the risks involved in the applicant's business model, and how these may be mitigated;
- an indication of the regulatory support required for the purpose of testing the business model;
- a testing plan, including the use case to be tested, the objectives of testing, a testing timeline and milestones, and the customer base targeted in the test; and
- a description of the next steps if the test is successful, and if the test is unsuccessful.
Following submission of the application, it is possible that applicants will need to further engage with relevant Members to address any queries they may have on the application. The FCA announcement does not specify any timeframe within which Members must approve or reject an application, although the expected date of Q2 2019 for commencement of tests suggests that applications will be processed within a period of up to four months.
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