The MFSA has recently published a Consultation Document on the firstpillar of its FinTech strategy which is targeted to support and improve regulatory efficiency in order to better cater for new technologies. The first pillar tackles ‘the Regulations’ which will be adopted as part of the MFSA’s objective in continuing to create a holistic long-term approach to catalyse innovation, growth and competition in the financial services sector whilst ensuring investor protection, market integrity and financial soundness.
The MFSA is seeking feedback on two important new proposals, namely: (i) the setting up of a Regulatory Sandbox; and (ii) new Regulatory and Supervisory Technology.
The Regulatory Sandbox
The MFSA’s Regulatory Sandbox is intended to encourage FinTech innovation and reduce regulatory uncertainty by: a) fostering innovation; b) ensuring effective investor and consumer protection; c) enhancing firms’ understanding of regulatory expectations; and d) knowledge sharing.
Three types of technology are proposed to fall within the scope of the MFSA’s Regulatory Sandbox:
- Product Innovation, which refers to innovative financial products or services offering leveraging on innovative technologies
- Process Innovation, which includes innovative processes using innovative technologies underlying the provision of, or materially supporting the provision of financial products and/or services offerings; and
- Institutional Innovation, which includes arrangements based on innovative technologies which underlie the provision of, or materially support the provision of, financial products and or services offerings.
The legal framework being proposed for this sandbox approach is twofold. One of the proposals brought forward by the MFSA is to have a Standalone Framework. This would necessitate the introduction of a new legal instrument which would also provide for a Sandbox Licence to be granted to Sandbox participants. The Authority’s alternative proposal is to have a legal framework that can function without the need of introducing a new legal instrument and which can effectively depend on the statutory objectives and powers under the MFSA Act that are deemed to be wide enough to cater for the implementation of this sandbox approach. The first legal framework proposal may be considered to be more onerous than the second.
The MFSA is proposing to accept calls for applications in two separate ways which will work simultaneously yet independently from one another. The first method includes the acceptance of a group of applicants which are given the opportunity to test their solutions for a period lasting up to 6 months, referred to as ‘biannual cohorts’. The second method would include the intake of ‘special purpose cohorts’ which include a number of applicants chosen by the Authority to undergo certain specific challenges.
The authority is also seeking feedback on a number of other important aspects such as the way in which sandboxing is to be conducted and structured, including its lifecycle, the Proposal Stage, the Selection Stage, the Application Stage, Sandbox Testing Stage, Sandbox Evaluation Stage and the Sandbox Exit Stage.
New Regulatory and Supervisory Technology
Over and above the introduction of a Regulatory Sandbox, the MFSA is also highly motivated to introduce RegTech and SupTech solutions to improve regulatory processes with the aim of helping authorised entities to efficiently comply with the regulatory and supervisory requirements.
The consultation period for this document is open to the public until the 30th August 2019 and any interested parties are encouraged to fill in the Authority’s online survey.
Article by Dr Cherise Abela Grech and Dr Sean Xerri de Caro
This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.