The Italian FinTech Sandbox explained by Giovanni Carotenuto

The Italian FinTech Sandbox is the main topic of the mentorship session given by Giovanni Carotenuto, owner of Carotenuto Studio Legale, one of the professionals who have chosen to become part of pur community. Let’s find out what is his opinion and which are the most important developments about this innovative regulatory initiative

Sandbox FinTech in Italy: where are we?

The Italian FinTech Sandbox (the “Sandbox”) has been introduced by means of Ministerial Decree no. 100 of 2 July 2021 (the “Decree”), which entered into force on 17 July. The Decree also established a FinTech Committee, chaired by the Minister of Economy and Finance and composed by the main Italian regulators, which is in charge of monitoring and fostering the development of FinTech in Italy, as well as keeping contacts with operators and competent foreign and EU authorities. The Sandbox comes at the end of a long process, which has seen the launch of several initiatives (such as, among others, the establishment of the Bank of Italy’s Fintech Channel and, lately, Milano Hub and the “Consob-Tech” project) enabling the dialogue with FinTechs in order to promote the development of innovative projects.

What are the main advantages of this initiative for a FinTech operating in our country?

The Sandbox’s main goal is to create the conditions for promoting the digitalisation of our country. To this end, the Decree has established a controlled environment where FinTechs can test technologically innovative services and products in the banking, finance and insurance sectors. In brief, the procedure envisages

  1. an initial admission phase, during which the applicant may informally consult with the competent supervisory authorities, in order to check whether it meets the requirements set forth by the Decree,
  2. a start-up phase with the definition of the testing’s modalities,
  3. the actual testing phase, which has a maximum duration of 18 months, but it may be extended if certain circumstances are met.

In other words, the FinTechs that intend to test innovative solutions may enjoy a temporary simplified regime, while dialoguing with the main Italian regulators. In light of the foregoing, the Sandbox offers to FinTechs the advantage to carry out a legal, financial and economic analysis of a service or productthey intend to offer, which meets certain requirements, in a safe environment where they can informally liaise with the competent authorities and enjoy, for a temporary period of time, less stringent rules than those normally applying in order to provide for such service or product. At the same time, the competent supervisory authorities can closely monitor the dynamics of the FinTechmarket, and identify the most appropriate regulatory interventionsfor fostering the development of such market while enhancing the protection of consumers. In turn, FinTech operating in Italy can save money and attract foreign and domestic investments, whether institutional or not.

How could a FinTech take advantage of opportunities provided by Sandbox? Any tips?

FinTechs may choose to apply for the Sandbox’s program to see whether a proposed service/product is “fit” for being launched on the market.In this respect, it is interesting to recall the UK experience, where a similar regulatory sandbox was setup in 2014 by the Financial Conduct Authority. According to the latter’s report thereon, issued in 2019, such program has allowed FinTechs to refine technology and developed better business models, finding greater ease of entry by halving the time to obtain regulatory approvals, whilst incentivising the same to stay in the market. Indeed, 90% of the companies that completed the testing phase have continued to pursue their business initiatives afterwards and almost all of them are still in operation today, whilst 76% of those admitted to the first group remained in business after 2 years and many of the interested FinTechs have expanded their business and obtained approvals for conducting further testing. Moreover, British investors have been found to be more likely to take advantage of a service/product tested in a protected environment, than of anuntested one. Finally, the UK FinTech sandbox has proven to be able to attract investments, taking into account that 17 out of 44 start-ups were acquired, or received over £135 million in funding,during the testing phase.

Which are the aspects of the Decree that could be enhanced in your opinion, and why?

The Sandbox’s regime (as regulated in details by the Decree) seems to have the right credentials for becoming a success by boosting the FinTech market in Italy. Of course, there is a risk that the testing may result in a duplication of the licensing procedure, since the operator that intends to continue to carry out its business after the testing must in any case start a new path leading to the authorisation of the service/product in question (and this means additional costs and time). Moreover, as ESAs’ joint report on sandboxes and innovation centres issued on January 2019 seems to highlight, there is a need for a stronger coordination among NCAs at EU level, where, at present, there is no mechanism promoting the spread of financial innovation throughout the Union, leaving room to the risk of regulatory arbitrage among Member States. In conclusion, it remains to be seen whether this may lead to the introduction of a EU-wide testing procedure, which would allow a FinTech that has successfully concluded experimentation in a given Member State to take advantage thereof and proceed to thenext steps in the rest of the Union.

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Author: Tudor Sava

22 Settembre 2021