Italy has become the latest major economy to launch a regulatory sandbox as it looks to encourage growth in fintech initiatives.
Sandboxes allow fintech start-ups to conduct ‘live’ experiments under regulatory supervision. They are becoming increasingly popular as financial authorities look to encourage start-ups and competition.
The Ministry of Economy and Finance, the Bank of Italy, Italy’s financial regulator Consob and the Italian Insurance Supervisory Authority (IVASS) announced in a joint press release [Italian language only] issued on 16 July that the decree launching a sandbox and establishing a ‘fintech committee’ had entered into force.
Specifically, this is a provision to Italy’s so-called ‘Growth Decree’, which was converted into law two years ago and mainly aimed at boosting growth through tax breaks and investment incentives. The Growth Decree handed the finance ministry the duty of adopting regulations defining the criteria to carry out the testing of fintech applications after consulting the other three authorities.
Fintechs need to be ‘significantly innovative’
In order to participate in Italy’s sandbox experiments, fintech operators will have to submit projects to the relevant supervisory authority depending on whether their activities fall in the banking, financial markets or insurance sector. The supervisory authorities are tasked with providing guidance to specify the criteria for admission.
In order to be admitted, projects need to be ‘significantly innovative’, the decree states, explaining that they should help to offer services, products or processes through the use of new technologies that are ‘new or different compared to what is already on the national market’.
Projects should be at a ‘sufficiently advanced stage for testing and be economically and financially viable’, according to the press release. Fintechs that wish to apply need to submit a detailed application, providing numerous documents. These include a detailed description of the project including goals, duration and expected added value, a proof of concept including an evaluation of financial sustainability, an assessment of potential risks and a description of appropriate remedial actions as well as user-safeguarding measures.
Admitted projects will be able to participate for a maximum period of 18 months with the possibility of filing for an extension. During the whole trial period the relevant authority will monitor the fintechs’ activities within the sandbox and is allowed to amend the terms under which they can continue experimenting.
Supervisors will determine the time window for submitting applications by September, according to the press release. Once the preliminary phase of applications has been completed, the official register of operators admitted will be published on the website of the fintech committee.
Fintech committee to meet quarterly
This fintech committee’s permanent members consist of the four aforementioned supervisory authorities as well as the presidents of the antitrust authority (AGCM), the data privacy authority, the Italian digital agency (agenzia per l’Italia digitale), the director of the Italian tax authority (Agenzia delle Entrate) and the representative of the Italian authority for European affairs (autorità politica delegate per gli affari europei).
The stated task of the committee, which will meet quarterly, is to ‘observe and monitor the evolution of fintech on the national, European and international level in order to identify objectives, define programmes and implement actions to encourage the development of fintech’. Beyond that, its job is to facilitate discussions between fintech companies and the authorities as well as to co-ordinate activities among the authorities themselves.
The committee is also primed to organise roundtable debates, hearings of operators and regulators, as well as publish studies and analyses.
Bank of Italy governor Ignazio Visco called the called the decree “another step forward in promoting innovation whilst continuing to safeguard against risk”, in a speech on 6 July shortly after the decree had been published but not yet entered into force. “This is, however, a delicate step, which requires that the utmost care be taken in striking the proper balance between the interests of operators and of customers,” he added.
Visco also mentioned the central bank’s launch of its ‘Milano Hub’ innovation initiative in December 2020 in order to boost co-ordination between public authorities, the private sector and academia under the central bank’s supervision. The northern city is Italy’s second-most populous city after Rome and was picked to host the hub owing to the significant number of banks, investors and researchers based there, ‘and for its great ability to engage in dialogue at European and international level’, the bank said at the time.
“We created an environment in which operators, academics and enterprises can engage in debate and discussion, share their analysis and research and offer support in the development of innovative projects capable of producing widespread benefits,” said Visco on 6 July.
Encouragement for policymakers
Examples of well-established fintech sandboxes include those operated by the UK Financial Conduct Authority (FCA) and Monetary Authority of Singapore (MAS).
Similarly to Italy, Spain’s authorities divided up supervision of projects in their own recently launched sandbox depending on the fintech company’s focus: banking, financial markets or insurance. Of the first 18 projects admitted to Spain’s sandbox, ten are being supervised by Banco de España (Bank of Spain – the country’s central bank). Four projects each are being supervised by the Comisión Nacional del Mercado de Valores (CNMV – the National Securities Market Commission, the government agency responsible for financial regulation of securities markets) and the Dirección General de Seguros y Fondos de Pensiones (DGSFP – the Directorate-General for Insurance and Pension Funds).
The Bank for International Settlements (BIS) published a working-paper in November 2020 exploring the extent to which gaining admission to a sandbox boosts fintechs’ access to finance.
Entitled ‘Inside the regulatory sandbox: effects on fintech funding’, the 42-page paper looked at the experience of the FCA sandbox in the UK. After a data analysis (2014-2019) the authors found that firms entering the sandbox saw an increase of 15 per cent in capital raised post-entry relative to firms that did not enter; and their probability of raising capital increases by 50 per cent. The paper’s authors concluded that their findings can be seen as an encouragement for policymakers to scale up experimentation in sandboxes.
‘Greece launches EU-funded regulatory sandbox in fintech push’ – our news story (15 June 2021) on Greece’s central bank launching a sandbox funded by the European Union via its Directorate-General for Structural Reform Support and implemented in collaboration with the European Bank for Reconstruction and Development
‘Spain’s sandbox welcomes first fintech projects’ – our news story (25 May 2021) on Spain’s regulatory sandbox preparing to welcome its first cohort of fintech projects
‘Brazil ready to launch fintech sandbox’ – our news story (9 November 2020) on Banco Central do Brasil (BCB) and the Brazil’s National Monetary Council (CMN) announcing the guidelines for the operation of a ‘controlled tests environment for financial and payment innovations’