Banking and Finance news alert: Law 7/2020, approval of the regulatory sandbox

The purpose of the Law is twofold. On the one hand, to facilitate the innovative process in order to improve financing opportunities, ensure the protection of consumers of financial services and guarantee financial stability and market integrity. On the other hand, to provide regulators and supervisors with greater knowledge of the developments and potential effects of digital transformation in the provision of financial services.

In addition to the regulatory sandbox, Law 7/2020 introduces the following new aspects of interest:

1. Application of the principle of proportionality in terms of the requirements for the development of a financial activity that are susceptible to consideration.
2. Possibility of engaging with supervisory authorities to raise questions relating a case of use of technology in financial services. Queries will be submitted by electronic means and shall be answered within two months, without the responses being binding.
3. Preparation of an annual report on digital transformation and the result of the tests.

In terms of the regulatory sandbox, the main aspects to be taken into account are outlined below:

1. What projects can access the regulatory sandbox?

Any technology-based innovation project applicable in the financial system, understood as one that may lead to new applications, processes, products or business models with an impact on financial markets, the provision of financial services and ancillary services or the performance of public functions in the financial field.

In any event, projects must be sufficiently advanced in order to be tested, which shall be deemed to apply if there is a prototype that offers at least the minimal functionality needed to verify its usefulness and thus enables its future feasibility, even if such functionality is incomplete with respect to subsequent versions thereof.

In addition, the project must provide a potential value or added value with respect to existing uses in at least one of the following aspects:

1. Facilitate regulatory compliance by improving or homogenising processes or other instruments;
2. Represent a potential benefit to users of financial services in terms of reducing costs, improving the quality or terms of access and availability of financial services, or increasing customer protection;
3. Increase the efficiency of entities or markets; or,
4. Provide mechanisms for improving the regulation or the implementation of financial supervision.

This pilot project will form the basis of the limited scope trials that will be conducted in the controlled testing environment, with or without users.

2. Who can apply to initiate a pilot project as an innovator?

Any individual or company, including technology companies, financial institutions, credit administrators, associations representing business interests, public or private research centres, and any other interested party.

3. How does one apply for access to the regulatory sandbox?

Applications must be submitted within thirty days of the application admission deadline which shall be established twice yearly. A standardised model, together with a supporting report, must be submitted through the Electronic Office of the General Secretariat of the Treasury and International Finance.

The application may also be submitted in English, however, the file shall always be processed in Spanish.

4. When will innovators know if a project has been accepted?

Upon completion of the pre-assessment, within 45-75 days from the aforementioned deadline, the list of accepted projects will be published together with the supervisory authority responsible for supervising it, which may be the Bank of Spain, the National Securities Market Commission or the Directorate General of Insurance and Pension Funds (or several of them), based on the field of activity of the pilot project.

5. What steps need to be followed in order to begin the tests?

The promoter must sign a test protocol with the designated competent authority. This protocol will establish the rules and conditions pursuant to which the tests shall be carried out.

If the test is with users, participants must sign a unique information document (which must be approved in advance by the supervisory authority). Users may withdraw from the test at any given time.

6. Who is responsible for any loss suffered by participants in the test?

The promoter is exclusively responsible. The authorities shall not, be liable in any case. Participants shall be entitled to compensation for any losses suffered pursuant to the provisions established in the protocol.

Accordingly, the promoter must provide financial guarantees to cover liability for loss or damages (e.g. insurance, bank guarantee or bond).

7. What happens if there is a breach by the Innovator during the tests?

If the promoter fails to comply with the provisions established in Law 7/2020 or in the protocol, or its duty of good faith, the authorities may decide to interrupt the tests and, if there has also been a breach of the guiding principles or disciplinary rules, the developer may also receive an administrative penalty.

8. What happens when the tests are completed?

The promoter must draw up a report assessing the results of the tests and the overall pilot project. Based on this report, the supervisory authority shall draw up its own document of conclusions regarding the development and result of the tests, which shall be published.

9. What are the implications of performing the tests in terms of regulatory authorisations?

The fact that a pilot project is accepted into the controlled testing environment does not confer any form of authorisation. It simply allows promoters to test their project with real users without having to obtain such authorisation while the tests are being conducted.

Upon completion of the pilot project or during its development, as provided in the protocol, the promoter may request authorisation to start the activity, if this has not already been obtained, or to extend it.

The advantage of participating in the regulatory sandbox is that supervisory authorities can reduce the authorisation procedure periods based on the knowledge acquired about the project.

10. Is the project’s confidentiality and industrial or intellectual property guaranteed?

The legal framework of the tests (both Law 7/2020 itself and the protocol) is intended to protect confidentiality, trade secrecy and intellectual property.