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The Global Financial Innovation Network’s use of cross-border experimentation with firms could offer lessons for how to facilitate international data flows with trust, says the ODI’s researcher Ben Snaith and Senior Policy Advisor Lawrence Kay

Domestic regulators around the world that want to enable the use of data in modern technology face difficult choices in the regulation of combinatorial innovation, but at least benefit from guidance on approaches such as anticipatory regulation.

How should these regulators cooperate internationally so that they can account for diverse national tastes towards data use, while facilitating the data flows with trust that could boost trade and economic growth? The OECD has a useful typology of international regulatory cooperation (IRC) and there are a handful of examples that could inform data flow issues, but there are few well-tested models of how to systematically account for anticipatory regulation approaches in IRC.

The Global Financial Innovation Network (GFIN) is a network of 50 financial regulators and related organisations, launched by Britain’s Financial Conduct Authority in January 2019 to encourage international financial innovation. Its intention is to facilitate cross-border private sector innovation in financial services, while accounting for consumer protection and the systemic risks that new financial products can bring, and proxies some of the situation faced by regulators of data in trade issues. Its use of experimentation – sandboxes – to do so means that it could be a model of how multiple domestic regulators can engage in anticipatory regulation across international borders, such as for the use of data in modern technology.

Fintechs have shown the potential for innovation, but also some of the risks. On one hand, better financial services can bring great benefit to customers, but on the other hand can harm consumers and financial systems. One example is Klarna, which offers customers the ability to pay for online shopping in credit-free instalments, which is a clear customer benefit. It has, however, been accused of ‘seducing’ people into debt. Each nation is facing challenges of regulating such new services, and this challenge becomes even greater if that service operates internationally. GFIN recognised in their founding consultation that the ‘...major emerging innovation trends within financial services are increasingly global, rather than domestic, in nature.’ GFIN was therefore established as a global network for a global problem.

Understanding GFIN

After consultation in 2018, the GFIN governance terms and membership were confirmed and its work split into three streams: collaboration, cross-border testing, and regtech and lessons learned. The network has now grown from 12 organisations to 50, creating  – according to the OECD typology – a loose regulatory partnership with some elements of a transgovernmental network. GFIN includes regulatory authorities from the world’s leading financial centres, such as the UK, UAE, US, Canada, Singapore. These are all part of the coordination group, which sets GFIN strategy and oversees all activity. It is currently chaired by Britain’s Financial Conduct Authority (FCA).

The GFIN workstreams are directed at two aims:

  1. To lower barriers for financial startups that want to enter foreign markets, helping to improve sector dynamism that benefits consumers.
  2. To govern emerging technology issues that are not restricted to one jurisdiction.

GFIN’s aim of lowering barriers for startups is framed for the long-standing question of market entry and improving benefits for consumers through competition, and is answering it through elements of anticipatory regulation. The GFIN cross-border testing pilot is a scheme that provides a space for firms which meet the application requirements of regulators to trial and scale new technologies in multiple jurisdictions. This speaks to several of the elements of anticipatory regulation in our blog on the topic.

The need for IRC in the management of modern technology is shown  in the activities of the coordination groups and three workstreams – a collaboration forum cross border testing and regulatory trials and lessons learned. The members of the coordination group, who meet every quarter and have semi-annual meetings, set the research agenda and workflow for GFIN; members can suggest and join new work streams should the need arise.  To support its activities, the GFIN is designed to be self-sustaining and independent of any wider organisation, with members expected to contribute the necessary staff resources required.

Co-evolving with private sector innovation

When firms attempt to work across borders, whether that is in a single new jurisdiction or multiple ones, they have to attempt to understand the new landscape. This is a highly complex task, requiring detailed knowledge of a complex system of actors, laws, policies and technologies. The scale and pace of innovation from firms utilising data and technology intensifies this complexity. By providing an experimental space for fintech innovation, GFIN is testing how to lower costs for companies, while sharing learning across domestic regulators and creating the possibility of ‘coevolution’ between technology and regulation, as called for by anticipatory regulation.

The network links small fintechs from one jurisdiction with regulators in other jurisdictions, to facilitate market entry and perhaps learning. For example, regtech firm Starling Trust – which uses artificial intelligence and machine learning tools to manage culture and conduct related risks – was partnered with financial authorities in Australia, Britain, Dubai, and Hong Kong. The intention was to enhance the company’s understanding of the regulatory expectations of other jurisdictions, while giving regulators a better idea of what innovative firms need.

We spoke with Stephen Scott, a founder of Starling Trust – one of the eight cross-border pilot participants – to understand how it worked:

Stephen succinctly described the problem that regulators are facing: “...the simple fact is, data flows across borders, regulators act within borders. That creates a whole host of problems.”

Due to the need to address this problem, Stephen was keen on the purpose of the GFIN. He argued that the development of GFIN and participation of a high number of global financial regulators showed a “growing recognition among bank regulators and supervisors – in every jurisdiction – that they have a common purpose...”. He also suggested that the participation of so many regulators demonstrated a shared view that “addressing any regulatory concern almost certainly involves some form of data and data analytics.”

To overcome some of the barriers of working with data across borders, Starling Trust applied for the cross-border pilot as they were “looking for guidance [and] collaboration” and for “...some way where the regulators can appropriately voice some guidance.” This demonstrates one of the main problems that firms are facing and also the promise of pilot programmes such as GFIN to mitigate these issues.

The ‘Cross-Border Testing: Lessons Learned’ report noted that “several of the applicant firms have faced considerable hurdles related to securing the necessary partners outside their home markets”, and Stephen mentioned similar issues: “There were questions early on, about whether or not we want to work with a different firm in each market.” According to the GFIN evaluation, this was a particular problem for regtech firms “who need to be partnered with a regulated financial services firm in order to participate in a regulator’s domestic sandbox.”

Experimentation by regulators is meant to be bounded by time and geography and monitored regularly, but caution by large financial companies taking part in the pilot has raised questions about how long cohorts of the sandbox should be. As Stephen pointed out, “...the financial institutions are necessarily and rightly cautious, conservative and slow moving when it comes to trialling an innovative technology, and particularly where that technology is one that is driven by sensitive internal data.” The question of the length of the scheme may also concern the difficulty of understanding different laws and regulations.

On the difficulties that GFIN faced, Stephen said that “trying to put this thing together with [many] moving parts… is unavoidably something that's just going to take time” but thought that any further pilot could be improved by giving the participating startups more opportunities to meet and network with one another, perhaps raising common understanding of different markets.

Developing understanding

Running experimental schemes with innovating firms should help regulators to learn how to reduce the regulatory burden on innovation. Following the first year of operating the network, GFIN released a Cross-Border Testing: Lessons Learned report, relaying a number of issues with the first trial of the cross-border pilot, which was prematurely halted. These challenges included a lack of applications from large or international firms; a shortage in applicant firms’ understanding of the services regulated or services provided by participating authorities; the difficulty that firms faced in finding partners; and their struggle in moving from proof of concept to proof of value.

In order to address these issues, GFIN announced a number of steps they were undertaking. To address the gap in understanding of a participating regulator’s authority, GFIN is developing a regulatory compendium. The compendium will document the types of activity regulators can support, which should make the complex landscape easier to understand. They believe a better website will provide a single mechanism to communicate with the market and will be more useful to prospective members and observers. With the addition of these changes, a future cross-border pilot should provide a better environment for safe and informed experimentation for fintech firms in international jurisdictions.

Final thoughts

The challenges faced by the Global Financial Innovation Network in its first attempt of a cross-border pilot, speaks to wider complications of international regulatory cooperation. The pilot was an experiment, which meant those leading it were heading into unknown territory. IRC is an under-explored area that holds promise as a mechanism to increase the ease at which regulators and firms can cooperate across borders in order to bring more innovative services to market. This promise can only be achieved, or even ruled out as a viable option, if more experimentation such as GFIN’s cross-border pilots takes place. Any new experiment needs to apply the lessons from GFIN, namely that a significant amount of planning needs to go into the process to coordinate and provide the information that firms and regulators need in order to collaborate.