Light Touch and Sandbox Insights on Regulating FinTech Presented by - - PowerPoint PPT Presentation

Light Touch and Sandbox

Insights on Regulating FinTech

Presented by Rafael Padilla Next Money MNL First Meetup. 22 September 2016

AGENDA

1. FinTech as subject of regulation 2. Heavy handed regulation 3. The light touch approach 4. Regulatory sandbox as emerging trend 5. Focus on specific legal risks a. consumer protection b. AML, CFT and sanctions enforcement

• 6. Observations on selected FinTech regimes in Asia-Pacific

a. Singapore b. Hong Kong c. China d. Japan e. Australia f. UAE g. Philippines

1| | FINTECH AS SUBJECT OF REGULATION

• Financial services are traditionally subject to heavy

regulation.

• But regulators don’t want another Red-Flag Law.
• Regulating FinTech entails balancing of interest

between public safety and innovation.

• “Regulations should control that which is bad and

support that which is good.” (Ditchley Conference

• n the Regulation of Cyberspace, 2000)

1| | FINTECH AS SUBJECT OF REGULATION (continued)

• Nascent FinTech space already witnessed a number of

high-profile scandals and compliance issues.

(e.g., E-gold, Liberty Reserve, Mt. Gox, Ripple Labs and Dwolla)

• Regulation will help:
• 1. legitimise disruptive technologies;
• 2. clarify misconceptions and settle controversies;
• 3. discourage bad actors;
• 4. (and consequently) increase consumer and

institutional adoption.

1| | FINTECH AS OBJECT OF REGULATION (continued)

Concerns on regulating FinTech

• Regulation lags behind new business/delivery models.
• Uncertainty
• n

regulatory treatment /characterisation when traditional financial systems partner with FinTech firms.

• Absence of regulation creates a compliance loophole

(e.g. AML).

• Fintech firms are not used to dealing with the compliance

and regulation unlike traditional financial institutions.

• Regulatory / compliance costs are expensive for start-ups.
• How

do you regulate decentralised / distributed applications?

2| | HEAVY HANDED REGULATION

U.S.A. (federal and state level)

• 2013 - FINCEN issued guidance advising that Bitcoin exchanges

and related enterprises are money transmitters under the Bank Secrecy Act. FINCEN required these businesses to register as MSB and to comply with AML regulations.

• 2015 – New York DFS issued the first ever Virtual Currencies (VC)
• Regulation. New York DFS was praised for being a pioneer, but

also criticised for establishing

• nerous

requirements and conditions to qualify for “BitLicense”. Many FinTechs operating in New York migrated their business elsewhere (e.g. UK, Isle of Man) to escape the compliance-ridden New York rules.

2| | HEAVY HANDED REGULATION (continued)

China

• The 2008 Financial Crisis slowed down the appetite of regulators for large-

scale reform. On the contrary, regulatory environment is tightening in China.

• PBOC intends to maintain great vigilance on shadow banking activities and

capital flight.

• In 2014, Ant Financial Group (Alipay) was spun off from Alibaba before its IPO

listing in NYSE partly due to concerns over regulatory compliance in China for digital financial services.

• P2P marketplace lending in China has led to widespread fraud (e.g. Ezubo).

PBOC is expected to issue regulations to target these types of fraud.

• PBOC has barred financial institutions from dealing or transacting with

bitcoin and other digital currencies.

3| THE LIGHT TOUCH APPROACH

• Pioneered by UK regulator FCA.
• The approach is intended to lower barriers to entry faced by

fintech start-ups by reducing compliance costs and promoting financial innovation while maintaining the fundamental principles of the regulatory and licensing framework governing financial services.

• In the U.S., one state – the State of Texas – has been

reported to be considering a light touch regulation on virtual currencies.

• But from the subject’s perspective, what is light touch is

relative.

4| | REGULATORY SANDBOX AS EMERGING TREND

• Under the regulatory sandbox, the UK regulator offers bespoke

guidance to FinTechs on whether their product/service comply with the relevant regulations.

• Within the sandbox, FinTechs could test their products without

immediately triggering regulatory consequences.

• FCA

may further waive

• r

modifying applicable administrative regulations if they prove to be too onerous for FinTechs.

• But UK laws and EU directives cannot be waived or modified by

FCA.

• By following FCA’s guidance, the FinTechs will be considered to have

complied with the relevant rules for the purposes of the sandbox.

4| | REGULATORY SANDBOX AS EMERGING TREND (continued)

• UK’s Innovation Hub is intended to give FinTech firms some

insight on how the regulatory system is going to play relative to the concepts and products they wish to bring to the market.

• Because regulators have limited resources FinTechs that

could “play” in the sandbox will actually be very limited.

• In UK, some 500 firms applied to the Innovation Hub

scheme; 270 have been accepted; only 18 have been

• authorised. (as of June 2016)
• The sandbox testing will be only for a limited period (6

months in UK, SG and AU; 2 years proposed in UAE)

5| FOCUS ON SPECIFIC LEGAL RISKS: a| Consumer Protection

• In

the U.S., a consumer-focused regulator – the CFTB (Consumer Financial Protection Bureau) was formed in the wake

• f the 2008 financial crash by the Dodd-Frank Wall Street Reform

and Consumer Protection Act.

• Remittance: money transmission laws, in particular the licensing

regime, are enacted mainly to protect consumers.

• In regulatory sandbox environment - regulators want to be sure

that as part of the authorisation process, the FinTech applicant has put in place the necessary safeguards, risk management and control systems to address the risks of the FinTech proposal.

• New York DFS proposed last week a pioneering regulation

requiring banks and other FI’s to carry out due diligence security checks on third-party service providers (Vendor Due Diligence) to enhance cybersecurity.

5| FOCUS ON SPECIFIC LEGAL RISKS: b| AML, CFT and sanctions enforcement

• Most of the jurisdictions advocating for light touch regulation

stresses that AML /CFT rules cannot be compromised.

• FATF Recommendation 15 (New Technologies)

“Countries and financial institutions should identify and assess the money laundering or terrorist financing risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products.”

• In 2014 and 2015, FATF issued a specific Guidance Note on

Virtual Currencies to complement the 2013 Guidance Note on Prepaid Cards, Mobile Payments and Online Payments.

• Just this month, the FATF announced that it needs to adjust its

recommendations to take into account emerging business models.

6| SELECTED FINTECH REGIMES IN ASIA PACIFIC:

a| SINGAPORE

• MAS is currently consulting on proposed guidelines on regulatory

"sandbox" for FinTech experiments, activity-based payments framework and creation of National Payments Council.

• For the duration of the regulatory sandbox, MAS will relax specific

regulatory requirements which an applicant would otherwise be subject to. (“materiality and proportionality test”)

• Singapore declared that AML rules and consumer protection – in

particular confidentiality and data protection - will not be bargained away by the light touch regulation.

• FinTechs are encouraged to approach MAS to discuss how

innovative solutions can be launched in regulatory sandbox, even at this moment that the proposed guidelines are being finalised.

6| SELECTED FINTECH REGIMES IN ASIA PACIFIC:

a| SINGAPORE (continued)

6| SELECTED FINTECH REGIMES IN ASIA PACIFIC:

b| HONG KONG

• HKMA recently established the Fintech Facilitation Office (FFO)

to facilitate the healthy development of the fintech ecosystem in Hong Kong and to promote Hong Kong as a fintech hub in Asia.

• HKMA and ASTRI introduced also introduced the FinTech

Innovation Hub for authorized institutions to conduct research, and developed a Sandbox for banks to test fintech services.

• HKMA will require bankers operating in HK to be trained and

certified to deal with cyber security and money laundering, to beef up its regulations as it competes to become the Asian hub for FinTech.

6| SELECTED FINTECH REGIMES IN ASIA PACIFIC:

c| CHINA

• 2015 (July) - PBOC, CBRC, CIRC, CSRC and MIIT jointly released the Guiding

Opinions on Promotion of Healthy Development of Internet Finance. It was the first comprehensive regulation issued by China in the FinTech space - setting compliance rules on internet payment, internet insurance, online lending, crowd funding and online sales of funds.

• 2015 (Dec) - PBOC published a regulation on non-banking online payment

service providers. Online payment service providers must obtain payment

• perating permit from PBOC to operate and must establish sound KYC

policy. They cannot engage in the business of securities, insurance, financing, trust, wealth management, FX or withdrawal services.

• 2016 (July) -

the NPC Standing Committee debated the proposal to introduce the Network Security Law to increase the safety of the users themselves, as well as to improve the quality of services within the fintech industry.

6| SELECTED FINTECH REGIMES IN ASIA PACIFIC:

d| JAPAN

• Japan introduced regulatory changes to reduce investment

restrictions for banks that want to invest in FinTechs and to require virtual currency exchanges to be registered with FSA.

• The Bank of Japan is currently considering FinTech into its
• perations due to its increasing impact on financial services.
• BoJ established the FinTech Centre on 01 April 2016 to reinforce

efforts in which the developments of FinTech will contribute to enhancing financial services and achieving sustainable growth

• f Japan's economy.
• The Financial System Council started a working group to

explore ways to make bank data and systems more accessible to FinTech firms.

6| SELECTED FINTECH REGIMES IN ASIA PACIFIC:

e| AUSTRALIA

• Since ASIC (Australian Securities and Investments Commission)

launched its Innovation Hub in 2015, there have been a surge of requests by fintech start-ups seeking assistance about how to navigate the regulatory requirements.

• ASIC have signed a deal to work with MAS to simplify licensing

processes and encourage cross-border trade. AU and UK also signed a mutual agreement on innovation. (Collaborative Approach)

• ASIC is currently consulting on its plans for a regulatory sandbox —an

innovation copied from UK regulators.

• ASIC is considering a limited industry-wide licensing exemption for

the sandbox, which would allow financial start-ups to test their services for six months.

• ASIC

established the Digital Finance Advisory Committee to streamline ASIC approach in facilitating new business models and in applying, or varying license and in granting waivers from law and regulation.

6| SELECTED FINTECH REGIMES IN ASIA PACIFIC:

f| UAE

Abu Dhabi

• FSRA recently circulated consultation paper on proposed light touch

approach on regulating FinTech and the establishment of “RegLab”.

• According to FSRA: “a progressive regulatory framework is required to

support, rather than stifle, the development and adoption of promising fintech Innovations.”

• Companies accepted onto the scheme will be given two years to

develop and test ideas - with those whose business is deemed viable approved to progress to full authorization. Dubai

• Established the Global Blockchain Council - to help understand the

potential and the regulatory implications of distributed ledgers and to run pilot projects.

• Current pilot projects are simple, and do not significantly impact

existing regulations.

6| SELECTED FINTECH REGIMES IN ASIA PACIFIC:

g| Philippines

“Totality Of The Client Experience” (per Gov. Tetangco)

• “We live in a digital age and financial services are expected

to be delivered and are in the form defined by financial technology.” “The digitization of financial services, more popularly labeled as fintech, requires innovation and support.” (Id.)

• “Today’s banking experience is more personal in the sense

that it is driven by FinTech. “(Id.)

• BSP relies on its E-money (Cir. 649), Consumer Protection

(Cir. 857) and IT Risk frameworks to enable the FinTech environment (Cirs. 808 and 859)

6| SELECTED FINTECH REGIMES IN ASIA PACIFIC:

g| Philippines (continued)

• BSP launched in 2015 a National Strategy for Financial Inclusion

(NSFI). One of its specific objective is to use technology to reach the “financially excluded”. Some policies outlined in NSFI:

• Promote interoperability in technology-based solutions taking

into account applicable standards and international good practices.

• Support from inclusive and efficient retail payment system that

will catalyze the use of electronic payments (e.g., person to person/business/government (P2P/B/G, G2P/B).

6| SELECTED FINTECH REGIMES IN ASIA PACIFIC:

g| Philippines (continued)

BSP Policy on Bitcoin

• Warning Advisory on Virtual Currencies (March 2014)

House Bill No. 4914

• E-Peso Bill (“E-Peso Act of 2014)
• Introduced by Rep. Kimi Cojuangco
• “At present, no official medium of exchange, or money, exists for the

internet… The Creation and Adoption of an Electronic Peso is, therefore, an idea whose time has come!” (Explanatory Note)

• E-peso is being proposed to be a legal tender; an electronic equivalent of

paper peso; and exclusive electronic legal tender.

• The bill proposed that E-peso transactions will be recorded in a ledger

system called “LOG CHAIN.”

• The bill also referenced bitcoin and “post-bitcoin cryptocurrencies”.
• Fortunately and unfortunately, the bill has been killed. No further updates.

NOTHING FOLLOWS Thank you.

Next Money MNL First Meetup. 22 September 2016