The IOSCO Growth and Emerging Markets Committee (GEMC) today published a Report on The Use of Innovation Facilitators in Growth and Emerging Markets with four recommendations for emerging market member jurisdictions to consider when establishing innovation facilitators.
The Report covers three types of innovation facilitators (IFs): innovation hubs, regulatory sandboxes, and regulatory accelerators. In recent years, financial regulators have adopted various initiatives to facilitate financial innovation. The emergence of Financial Technologies (Fintech) has the potential to improve outcomes for investors and consumers of financial services by, amongst other things, expanding choice and lowering prices, fees, and commissions, reducing transaction costs, improving transparency in products and markets, and increasing financial inclusion. However, Fintech also creates new challenges for financial regulators.
The Report was prepared during the COVID-19 pandemic, which reinforced the use of technology around the globe, notably due to social distancing restrictions. The Report found that a regulatory response to financial innovation requires a balanced approach between the potential opportunities of innovation against the risks for investors, the integrity of markets and the stability of the financial system.
Dr Mohammed Omran, GEMC Chair and Chairman of the Financial Regulatory Authority of Egypt, said, “With the growing evolution of technological advancement, innovation facilitators provide an environment for firms to test their innovative products and to better comprehend the regulatory and supervisory expectations, in a manner that serves the public interest and does not bypass any legal and regulatory requirements, while ensuring investor protection, market integrity and the stability of the financial system. This Report sheds light on some of these regulatory and supervisory expectations and provides the ecosystem for establishing an innovation facilitator within the proper regulatory ambit.”
A jurisdiction’s environment and characteristics remain among the most important considerations when assessing the establisment of an IF. Before a jurisdiction decides to set up one or another type of IF, policy makers and securities regulators should objectively review the existing legal and regulatory framework, the stakeholder ecosystem, including the private sector and other regulatory or supervisory bodies, the capacity and resources available, as well as the market conditions, including the competition frameworks and the overall maturity of the Fintech industry in their jurisdiction. To assist the relevant authorities in performing this analysis, the Report includes a decision tree with the steps to consider before setting up any IFs.
The proposed recommendations cover four areas:
- Considerations prior to the establishment of innovation facilitators;
- Definition and disclosure of objectives and functions of innovation facilitators;
- Criteria for application, selection and exit pf eligible entities; and
- Mechanisms for cooperation and exchange of information with both local and foreign relevant authorities.
Lucía Buenrostro, PhD, Chair of the GEMC Fintech Working Group said, “This Report has been a collective effort of the GEMC members as financial innovation remains a priority for emerging markets. I am confident that the recommendations made here will contribute to having a sound balance between the regulatory and market development in emerging markets while guaranteeing investors´ protection, market integrity, and the stability of the financial system. This Report is certainly providing a useful guide for regulators in terms of market pre-conditions, criteria, and international cooperation.”