Home Policy & Governance Spanish regulatory sandbox gets green light

Spanish regulatory sandbox gets green light

Madrid: the fintech sector in the Spanish capital - and beyond - has been looking forward to the opening of the regulatory sandbox | Credit: falco; Pixabay

A regulatory sandbox is finally on the cusp of going live in Spain after the country’s parliamentarians approved a new law on digital finance that endured a stop-start journey on the road to ratification.

Sandboxes allow fintech start-ups and other innovators to conduct ‘live’ experiments under regulatory supervision. They are becoming increasingly popular worldwide, with Brazil the latest country to confirm sandbox details. Established examples include those operated by the UK Financial Conduct Authority (FCA) and Monetary Authority of Singapore (MAS).

In Spain the Council of Ministers signed off the ‘Ley para la transformación digital del sistema financiero’ (‘Law for the Digital Transformation of the Financial System’ – DTFS) – which lays the ground for the implementation of a sandbox – during the first quarter. But parliamentary ratification has taken longer than would typically be expected, largely due to the priority of responding to the COVID-19 pandemic, which has hit Spain particularly hard.

But, to the excitement of the country’s fintech sector, Congress approved the DTFS draft unanimously on 17 September. This was followed by approval from the Senate on 4 November, with 262 votes in favour. It has now been published in the Official Gazette.

Sandbox should boost fintech jobs and funding

Spanish fintech association AEFI (Asociación Española de Fintech e Insurtech), created in 2016 to encourage a business environment favourable to the country’s growing number of fintech and insurtech companies, is delighted.

Leyre Celdrán, business manager at AEFI – which has about 150 members – told Global Government Fintech: “The Spanish fintech market has always been highly innovative. During the ongoing health crisis, fintechs’ business model – flexible and fully digital – has enabled the development of many products and services.

“But, so far, fintech in Spain has faced two main problems: regulation and a lack of funding. The sandbox will attract talent, and – we estimate – generate 5,000 jobs over the next two years and around €1bn [$1.18bn] of additional investment. Not only that, it will also boost competitiveness and attract innovative projects from all over Europe.”

Sandbox is ‘long-awaited’ in Spain

The pandemic is the second major reason for the stop-start progress of the new law. Before Covid-19, Spain was stuck in almost a year of political deadlock following an inconclusive general election in April 2019. A repeat election one year ago saw Pedro Sánchez’s Socialist Party (PSOE) claim most seats but fall short of a majority. Sánchez now heads a coalition government with the leftist Unidas Podemos.

Ceyhun Pehlivan, managing associate in Madrid at law firm Linklaters – which has produced a briefing on the sandbox – told Global Government Fintech: “Spain has already a very dynamic fintech ecosystem in terms of fintech companies per capita. The long-awaited regulatory sandbox is expected to further increase competition and technological innovation in the Spanish financial sector. It has been very much welcomed by the Spanish fintech community.”

Fintech experimentation will come under the supervision of three authorities: the Banco de España (Bank of Spain – the country’s central bank); 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 organisation responsible for supervising depends on the sector in which a project is being implemented: banking, financial markets or insurance.

Next step: opening applications

“At the moment it remains to be seen how the supervisory authorities will implement and select the first sandbox projects,” said Pehlivan. “With the law now published in the Official Gazette, the authorities have one month to approve the application form and set the deadline for submission of the first sandbox applications. In any event, thanks to the sandbox, Spain takes its place alongside the pioneer countries in the global fintech sector.”

Applications to the sandbox will need to be made electronically through a form published by the Secretariat General for the Treasury & International Financing (Secretaría General del Tesoro y Financiación Internacional), according to Linklaters’ briefing, which also points out that the sandbox will not only be of interest to fintech start-ups but also to established businesses seeking to progress innovative projects. Applications can be submitted in English.

Global Government Fintech last week reported that the Switzerland-based Bank for International Settlements (BIS) last week published a working-paper 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% in capital raised post-entry relative to firms that did not enter; and their probability of raising capital increases by 50%. The authors concluded that their findings can be seen as an encouragement for policymakers to scale up experimentation in sandboxes.