Digital transformation of the financial system in Spain

November 2018 | EXPERT BRIEFING | BANKING & FINANCE

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The FinTech sector – in its broadest sense, also encompassing InsurTech – has become more prominent in recent years in the framework of the digital economy. As startups aim to innovate and change the way we understand financial services, new technologies have continued to grow in number. There certainly seems to be an increasing appetite for investments in FinTech ventures. Thus, as financial services continue to evolve, regulators should not be caught ‘off guard’ by the most innovative business models. In this sense, the first so-called ‘regulatory sandbox’ in the financial field saw light in the UK in mid-2016.

The UK regulator, the Financial Conduct Authority (FCA), has firm plans to launch a global FinTech regulatory sandbox – the Global Financial Innovation Network (GFIN) – in alliance with other ‘watchdogs’ in third countries, such as the US or Hong Kong. These plans respond to the FCA’s reflection on two primary ideas: the success of the domestic regulatory sandbox in making companies attractive for financing and the need for international standards, so ventures test their models at a global level, which ultimately is the market where they will be operating. Smooth navigation between foreign jurisdictions is seen as the last step of this project.

Furthermore, paving the way for innovative business models to reach EU scale has been set as a priority by the European Commission in its FinTech Action Plan, released on 3 March 2018. Accordingly, the Spanish Ministry of Economy and Business published the preliminary draft bill for the law of ‘digital transformation of the financial system’ on 10 July 2018.

A regulatory sandbox allows public authorities to build a controlled environment where FinTech companies do not find strict rules that might hinder their growth and innovation, while the protection of consumers is ensured.

Amid this international wave of regulatory sandboxes, Spain has published a draft bill for a new law on financial services which run on new technologies. The draft bill makes clear from the beginning that a regulatory sandbox provides benefits to both financial services providers and consumers, through the promotion of growth in the number of services and in their quality. This regulatory tool provides a means to gain knowledge on the latest developments in this regard, and to assess their effects on the financial system, while helping service providers to comply with current regulations at the same time. All this is to be attained by means of an implementation scheme with a law that regulates the general framework of the ‘sandbox’ and a test protocol that establishes in detail the trials that will be carried out.

Having introduced a regulatory sandbox that will fledge into the Spanish draft bill for the law of ‘digital transformation of the financial system’, how to use sandbox must be established by Spanish authorities. Innovative projects aimed at sheltering under the regulatory sandbox in Spain would have to provide certain added value – in order to be deemed as innovative – in at least one of the following features: (i) to be aimed at improving regulatory compliance through procedural enhancement or standardisation, (ii) to involve a potential benefit for financial services users in terms of improving the quality of, access to and availability of services or strengthening protections for customers; (iii) to increase entity or market efficiency; or (iv) to help improve regulations or the way that public authorities supervise financial services.

As far as the procedure for using the sandbox is concerned, FinTech companies would have to send an application to the General Treasury and International Funding Secretariat. Applications need to include an explanatory report detailing the project and the way they comply with all the previous requirements, including how the company will comply with the guarantee scheme. Received applications would be forwarded to their respective competent authorities (i.e., the Bank of Spain, the Spanish National Stock Market Commission and/or the General Insurance and Pension Funds Directorate), which will evaluate them. Only those companies that are found to meet the specified requirements will see their applications sent back to the Secretariat.

A project with a favourable prior assessment will be given the ‘green light’ for the project promoter and public authorities to start collaborating on the implementation of a controlled environment – the testing protocol. The testing protocol would take the form of a document subscribed by the promoter and the competent authorities establishing the conditions in which the project tests will be developed, including a limitation in the volume and the time for carrying out the tests, the information that would be provided to authorities and the means of access to it, the project stages and the objectives that would have to be achieved, as well as the extent and duration of the test, the resources that the innovative company will require to carry out the test, and the guarantee scheme to cover potential liabilities.

It is of particular interest that the draft bill for the law on ‘digital transformation of the financial system’ also envisages a guarantee scheme to protect participants in the regulatory sandbox. This guarantee scheme would be mainly aimed at covering potential liabilities for the damages caused to test participants, but also includes provisions for data protection, withdrawal rights and confidentiality. Participants would have to give their consent, having been previously informed, to freely and willingly use the sandbox. Promoters must also bear in mind that the draft bill states that losses arising from market fluctuations will not be deemed as damages. It should be borne in mind that either the promoter or the supervisory authorities may interrupt tests if it is justifiable.

Once tests come to an end, the project promoter will need to complete a memorandum evaluating the results obtained that will be forwarded to the competent supervisory authorities. If tests lead to successful activity, supervisory authorities may grant a licence that would determine the transition from the regulatory sandbox to the operation of ordinary activities (simplifying the access requirements and applying a thorough proportionality criteria – meaning that it should be applied with the least restrictive measure and be justified to protect the public interest). In such case, innovative projects may now be deemed a suitable asset for the investment of venture capital entities and the proportionality principle for the project authorisation will be explicitly established.

The draft bill also envisages additional measures to favour digital transformation, such as specific means of communicating with supervisory authorities or setting up a box for written consultations with competent administrations. Likewise, the draft bill ensures thorough collaboration between the supervisory authorities for the proper functioning of the testing controlled environment.

Finally, the main conclusion to be drawn is that the implementation of the regulatory sandbox in Spain intends to bring many benefits for both entrepreneurs and regulators. For entrepreneurs, it will allow for the verification of the technical and economic viability of a project before incurring expenses that involve administrative authorisation for a regulated activity, which should ease the funding of innovative projects. Regulators will be more aware of upcoming innovations, making it easier for them to forestall eventual risks for consumers. In any event, this is a draft bill (the public audience stage concluded on 7 September 2018) and many features may still be amended or developed in the final text of Spanish law for the digital transformation of the financial system.

Samuel Martínez is a lawyer at Osborne Clarke. He can be contacted on +34 91 57 64 476 or by email: samuel.martinez@osborneclarke.com.

Samuel Martínez

Osborne Clarke