Regulating for innovation: How to encourage responsible market innovation
Regulating for innovation: How to encourage responsible market innovation5 January, 2018 •
For regulators, the dual implications of innovation make it a critically important but challenging topic to address. Regulators with a mandate to encourage market development and sectoral growth are obliged to encourage innovative providers and products that help to drive this market development and enhance consumer value. However, regulators are also required to limit systemic and consumer protection risk. Since innovation is new by nature, it can be difficult or impossible for regulators to identify and deal with risks a priori.
The concept of a regulatory sandbox offers a regulatory approach that can help regulators to tread this delicate balance. Using this approach, regulators can create a regulatory safe space for innovators to test their products by temporarily reducing or waiving regulatory requirements (either explicitly or implicitly) while imposing specific safeguards to ensure that consumer protection is not compromised. In practice, the design and nature of these sandboxes differ significantly across different contexts. Indeed, while “sandboxing” may be the new buzzword, the underlying concept is similar to that employed by countries that have already implemented a controlled test-and-learn approach. A core rationale for the regulatory sandbox is that it provides the regulator with the opportunity to learn about the new types of risks that emerge from a new innovation. It enables them to tailor subsequent regulation accordingly, thereby informing the broader regulatory design.
A sandbox is not a magic bullet and is not a single, one-size-fits-all intervention for regulators. To implement any kind of sandbox, a regulator must first have the mandate to support innovation, as well as the discretion to do so without amending legislation. Contextual and market realities must also be considered to ensure that the approach designed is appropriate to their specific context. Coordination among different regulatory authorities, and capacity to implement and monitor, are further core considerations.
The Regulating for Innovation study unpacks approaches to regulating for innovation, with particular focus on the concept of the sandbox principle. Drawing on a number of country examples, the study explores the potential benefits, as well as the prerequisites and considerations required by regulators to effectively implement approaches (like sandboxes) to responsibly encourage innovation within their markets.
Listen to the recording from Cenfri’s Regulating for Innovation webinar presented to key market facilitators within the financial sector
This work forms part of the Risk, Remittances and Integrity programme, a partnership between FSD Africa and Cenfri.