Financial Services: No “Sandbox” in Germany
British start-ups in the financial sector enjoy more freedom – is that better?
Innovative providers of financial services in Great Britain are allowed into the sandbox: In the “Regulatory Sandbox”, such undertakings can test their business models in the market under less stringent regulatory supervision before becoming obliged to fulfill stricter regulatory requirements. In Germany, this idea has encountered some resistance.
The first supervisory authority to do so anywhere in the world, the British Financial Conduct Authority (FCA) started the promotional programme “Regulatory Sandbox” at the beginning of last year. It gives technology-driven financial services providers (fintechs) the possibility to test their products in the market for some time on the basis of a simplified procedure – and under close guidance and supervision by the FCA – before they submit to the full regulatory regime. Whereas some of these undertakings offer typical banking services as well as giro accounts and the processing of payments, others provide further services in addition to the classical services, e.g. swarm financing and the like.
No “little buckets and spades” for German fintech companies – this is how clearly it was put by Felix Hufeid, President of the German Federal Financial Services Supervisory Authority (Bafin), at the beginning of this year. All fintech companies are governed by the strict regulatory requirements of financial regulatory law. They can put their innovative business models on the market only once they have obtained the permit necessary for this from the Bafin or the European Central Bank (ECB). This especially concerns business models which involve banking services, financial services or payment services, the management of investment assets or the issuance of e-money.
But to obtain this permit, fintech companies must overcome high obstacles. Thus, depending on the business model, they must put up a considerable amount of initial capital, set up a risk management system, show the professional competence and reliability of the managing directors, and install an IT safety system. This raises considerable difficulties especially for many start-ups.
But in Germany, the British sandbox arrangement has met with little enthusiasm so far on the part of the supervisory authorities. The Bafin maintains its opposition. From a legal point of view, this is ultimately also a consistent position. The Bafin has no authority to allow exceptions to the mandatory requirements of financial regulatory law. Moreover, it has not been authorized by the legislator to promote individual undertakings.
Also numerous representatives of the German fintech scene have expressed views critical of the introduction of a sandbox following the British model and have rejected any “regulatory honeymoon”. They fear that such special treatment could damage the reputation of the companies concerned, and they emphasize that they wish to be taken just as seriously as the established players in the financial services sector. This is essentially right. The high regulatory requirements do represent considerable challenges faced by fintech start-ups. But at the same time, they induce the market to give these start-ups the benefit of the doubt. A regulatory sandbox for these companies would undermine this trust and unsettle both clients and investors. This would put the fintechs at a disadvantage which could not be made up for merely by innovative ideas.
Moreover, already today a start-up which cannot or does not want to fulfill the regulatory requirements has the possibility to realize its ideas in cooperation with a licensed cooperation partner. Once the product has proved its value in the market, the start-up can still apply to the regulatory authority for a permit and risk the step into independence. All things considered, the stronger regulatory framework is thus an advantage for Germany as a business location.