ESBG believes that communication plays a key role, particularly when it comes to rethinking the relationship between banks (supervised entities) and supervisors. There is room for a more pro-active role of supervisors, which expresses advice and guidance ex ante, and not only ex post. 

ESBG sees innovation hubs as extremely helpful and as a commitment from supervisors to evaluate ideas in a different way (e.g. pro-active approach, ex-ante, expressing guidance). Supervisors go beyond their traditional role of watchdogs and take a step closer to becoming sources of valuable guidance for the wider interest of the banking sector. 

ESBG also believes regulatory sandboxes might be beneficial, provided they are: (a) inclusive (b) fully harmonised. For instance, when only a few players are accepted within a given regulatory sandbox, there is a risk of creating an unlevel playing field. Furthermore, the adoption of regulatory sandboxes in the EU is still too fragmented and differentiated: harmonisation is a key element when it comes to cross-border risk management.​

Identified Concerns

ESBG identifies as main barriers for new RegTech solutions to scale up in the EU single market:

• Lack of harmonisation of EU rules
  Lack of clarity regarding the interpretation of regulatory requirements (e.g. reporting)​
  Lack of standards
  Lack of supervision for RegTech within the EU
  Frequent changes in the applicable rules

ESBG strongly believes in the principle that innovation comes from different kinds of players (FinTech startups, BigTech companies, incumbent banks). Hence, players of any size should be included in innovation hubs or regulatory sandboxes so to always maintain a level playing field. The current selection criteria of regulatory sandboxes are not always clear. If regulatory sandboxes include regulatory relief, they can threaten the level playing field and consumer protection. This results in competitive disadvantages for market participants who do not participate in the sandbox. Under no circumstances should the selection of participants in an innovation facilitator be based on the type of the entity. Innovation facilitators can only be beneficial if they remain harmonised and equally open to all actors.

Competition between national supervisors on the basis of regulatory arbitrage should be avoided. Sandboxes should not become an economic tool to attract new national market entrants.​

Why Policymakers Should Act

Regulating innovation is challenging. ESBG acknowledges the difficulties regulators might face in creating incentives for innovation. Proposals to enhance supervisory consistency could contribute to a convergence in domestic innovation policies across the EU, thereby facilitating the emergence of a single market for financial services.

Europe still remains outside the initiative of the Financial Conduct Authority’ (FCA) to create a “Global Financial Innovation Network” (GFIN officially launched in January 2019), as there are, at this stage, only a small number of European supervisors involved (Lithuania, Luxembourg, Hungary). As one of the main functions of the GFIN is to establish a network of regulators, it is indeed essential to ensure that the views of Europe can be expressed and defended. EU authorities should represent Europe in any international network, including the GFIN. Furthermore, EU financial entities should have the possibility to be part of any trials across multiple jurisdictions globally.

Background

RegTech helps companies to identify, manage and mitigate risks. RegTech brings direct benefits to supervisors, allowing for a change in approach which is also beneficial for the banking industry. In order to be adopted effectively by the industry, RegTech needs a cultural shift. Supervisors should harmonise the regulatory framework. A pro-active dialogue between supervisors and banks could benefit not only innovation, but also governance. Innovation hubs allow supervisors to work more closely with the industry and to get a more hands-on approach to innovative projects. There are increasing cooperation and partnership opportunities among incumbent banks and FinTech start-ups to provide innovative products and services that they indeed would need to test. ESBG supports the ability to experiment within a controlled environment and test new products and services, while exploring new regulatory requirements and building up critical know-how for future regulatory requirement definitions. Moreover, establishing networks of cross-sectoral innovation hubs could prevent situations where a regulator or supervisor adopts guidelines, recommendations or opinions without taking into account relevant implications that are analysed by a supervisor from another sector.​