The objectives of the sandbox appear to be sound as they form a holistic conglomeration of objectives; the sustainable financial innovation and reduction of regulatory uncertainty. An additional objective could be the safeguarding of the environment by ensuring that the innovation supports sustainable development vis-à-vis the environment. It is crucial to weigh the benefits and costs and guarantee that the former exceed the latter. For instance, mining bitcoin uses as much CO² a year as one million transatlantic flights, as reported by The Guardian. Hence, it is of utmost importance that, like Bitcoin, these innovations bring something new to the table.
It makes sense that only innovations bringing something new to the table would be eligible. They do not necessarily have to be in the form of a product; these innovations may also be in a procedural manner or in the form of an institutional innovation that supports financial products, amongst others. It may be good to add to the list those innovations which, although not entirely unseen before, bring the same technology forward but with a twist, in the sense that it offers something new despite offering the same technology. Hence, it is good to allow innovations that use old technologies but which introduce a new, or improved, concept.
With regard to the legal framework, we must first understand the current trends the Maltese legislator has been pursuing. If we look at the administrative law sphere in the Maltese scenario, one does not find an Administrative Code but rather a number of Acts specifically regulating an area that requires amending or enactment. Thus, one will find that the laws regulating Data Protection and those regulating Expropriation are dealt with in two separate Acts. It is true that although these notions fall from the same tree - that being administrative law - the legislator feels it is better to deal with them in a stand-alone manner.
In the same way, it is true that the sandbox goes hand-in-hand with the MFSA, but it makes more legal sense to have a standalone framework. Given the volatility surrounding FinTech, since it is an always changing concept, it would be more burdensome to make constant amendments to the MFSA Act rather than to a standalone Act and it would less likely to hinder the rest of the provisions. Also, it is much easier to consult one Act, rather than having to refer to other Acts which, in turn, may further refer to additional legislation.
Bi-annual cohorts promote a smoother operation of the system and cause much less confusion due to having a prescribed and fixed time period in which applications are accepted. However, dispersing the applications over an indefinite period could alleviate the burden of having too many applications at once. Having said this, it is sound to allow special cohorts to apply, regardless of the particular time of application. It would prove to be extremely frustrating if this were not to be implemented, because if an applicant does not apply in time - for some particular reason - then the applicant would have to wait another six months to submit the application.
Six months is a long time in the FinTech industry due to the already mentioned aspect of volatility in technology. It makes sense to have a specific timeframe for the rest of the applicants to process the application in an equal manner. FinTech is changing at a rapid pace, so if there is the introduction of some type of benefits, the older applicants would not enjoy them. Having a fixed period for applications would place all applicants on the same platform. It is easy to see that implementing a binary system, in which both methods are in use, is the most reasonable way forward.
The sandbox lifecycle appears to be linear and reasonable, but in order to offer a better incentive to the applicants and encourage submissions, the addition of an appeal option seems to be appropriate. Refused applicants would be able to appeal against the refusal of their innovation and receive a better explanation as to why the application was rejected in the first place. This suggestion does not imply a court-like structure but more an informal, fast-paced tribunal, similar to rent and industrial tribunals. Apart from providing clarity to the applicant, it could also establish a form of precedent to which future Authorities would be able to refer. This would not be an obligatory precedent, as it merely serves as an indicator to the Authority as to which applications are usually accepted and which are refused and why this is so. The tribunal-like option would allow the process to retain its smoothness and rapidity.
Furthermore, since the MFSA is vested with the discretion of assessing whether an application meets the criteria or not, the creation of some sort of standard seems to be required. This implies both equality and objectivity, ensuring that applicants in a similar position are not treated differently. With regard to the Board, the MFSA must ensure transparency as this is of crucial prominence, especially in situations where liability must be allocated to a person. The Board could also refer to experts in certain situations similar to the concept of 'periti' in the Maltese courts. These would offer a second layer of protection vis-à-vis the applicants, but the final decision should always be vested with the Board because, were it to be otherwise, the Board would lose its scope.
In relation to the test criteria, the idea of having an independent third party involved seems to be fruitful in this situation. Instead of having the test rely on data provided by the applicant, a third party should conduct research and apply the same test criteria in order to ensure objectivity. In a similar way, the evaluation stage should also see the introduction of a third party that prepares the report. Or else, instead of having only the Authority and the Applicant conducting the report, a third party could also prepare such a report and then the reports could be compared and contrasted.
The idea of establishing foreign links is undoubtedly suitable. It appears to be best if priority is given to those jurisdictions with similar frameworks to ours, in the sense that our local framework shares some form of similarity to that of the other jurisdiction. This ensures uniformity and clarity. We are not instilling the idea to put aside other jurisdictions with a different framework; we are merely suggesting that priority should be given to those jurisdictions with similar legal frameworks.
Regulation is one of a number of services to receive the 'Tech' treatment in recent times. As with its bigger brother Fintech, the definition of RegTech will mean different things to different people in this developing area. While the name is new, the marriage of technology and regulation to address regulatory challenges has existed for some time with varying degrees of success. Increasing levels of regulation and a greater focus on data and reporting has, however, brought the RegTech offering into greater focus, thereby creating more value for the firms that invest in these solutions.
Jurgen Dalli is a Legal Researcher within PKF Malta