Following the approval of the Spanish Draft Bill for Digital Transformation of the Financial System by the Spanish Council of Ministers, this note explains the 'sandbox' mechanism and analyses the main requirements to access it, and the next steps to be considered.
On 18 February 2020, the Spanish Council of Ministers approved the Spanish Draft Bill for the Digital Transformation of the Financial System (Draft Bill), with the purpose of creating a Spanish 'sandbox'. The Bill was then submitted to the Spanish Parliament for processing. The Draft Bill introduces a new suitable legal framework to ensure that innovation in the financial sector is incorporated and developed in an efficient and secure way for consumers.
The sandbox is a testing environment for innovative technology-based financial business projects, which involves trialling projects with real users initially for six months but subject to potential renewal. In essence, this initiative is seeking technological change in the financial sector while, among other objectives, safeguarding the protection of consumers, the maintenance of financial stability and market integrity, and the prevention of money laundering and financing of terrorism.
The Spanish sandbox
The Draft Bill sets out a law-protocol structure that states that any trial projects entering the sandbox must comply with:
(i) the general mandatory regime provided in the Draft Bill; and
(ii) the 'trial protocol' or specific regime that is to be developed for each of the referred projects when they enter into the sandbox, and entered into by the business promoting the projects and the appropriate competent authority. Any trial protocol is to be shaped accordingly and in consideration of the aspects that will vary depending on the nature of each project, namely volume and time of the tests; phases of the tests; resources necessary and available for project execution; amount of the legally required guarantees; etc.
Suitability to participate
The proposed sandbox under the Draft Bill is not only aimed at FinTechs and start-ups, but also any other types of entities, all of which may either individually or jointly present their projects, for example as a joint venture between a start-up and a credit institution or an insurance undertaking.
The Draft Bill provides that a project should meet the following criteria to enter the sandbox:
1. it needs to be innovative in direct relation with the financial system;
2. it needs to have already reached a sufficient level of maturity (i.e. it does not consist of a mere idea, and is minimally functional to be tested and proven useful);
3. it shall be a source of value creation as regards, at least, one of the following aspects:
(a) ease of legal and regulatory compliance;
(b) improvement of the quality, accessibility and variety of financial products and services in the market;
(c) enhancement of consumer protection;
(d) increase of entities’ or markets’ efficiency; or
(e) contribution of mechanisms to improve existing regulation or the execution of financial supervision by competent authorities.
So, all projects applying to the Spanish sandbox must ultimately generate an impact on the financial system, which at the same time is expected to positively affect legislative and supervisory bodies, consumers, or the market in general.
Although other countries have implemented or are developing their own versions of the sandbox, the Draft Bill has ascertained the uniqueness of the Spanish sandbox, given the two modalities it offers for projects:
- Non-application of regulation: regarding this arrangement, projects may be tested while exempted from compliance with certain existing legal provisions set out in the regulations which, under normal conditions, would be applicable and compulsory.
- Non-existence of regulation: projects seeking to develop currently unregulated activities under Spanish law may be tested for the purpose of contributing to the definition of a legal and supervisory framework as one of its trial results (i.e. for any activities developed under the projects to be legally incorporated into the financial market, therefore permitting their future development in accordance with newly developed regulations that ensure consumer protection).
The Draft Bill configures the sandbox in three phases: access; trial; and exit.
Access: to enter the sandbox, the business promoting the project needs to apply to the Spanish General Secretariat of the Treasury and International Finance (Secretaría General del Tesoro y Financiación Internacional or SGTFI) through its website. Along with the application, a memorandum explaining the project to be tested and justifying compliance with the legal requirements set out in the Draft Bill must be submitted.
Competent authorities (i.e. the Spanish Securities and Exchange Commission, the Bank of Spain, or General Directorate of Insurance and Pensions Funds) have one month to evaluate the application, particularly with regard to compliance with the access requirements. The result is to be forwarded to the SGTFI, which will publish the list of admitted projects on its website. Such admission is to be regarded as provisional and subject to establishing and signing the relevant trial protocol as applicable to each project.
The drafting and signing of the trial protocol is mandatory, since it will set out the conditions under which the project tests and trials are to be carried out and serves as the specialized delimiting regulatory framework for the project.
Trial testing: the business promoting the project and the competent authority responsible for supervising the trials and tests over the six months following the project's entry into the sandbox must approve the trial protocol. In addition, consumers willing to participate in the trials and tests developed in the sandbox have to give their informed consent before the tests and trials begin.
The competent authority supervising the project can order suspension or termination of the trials and tests in the event of non-compliance with the Draft Bill and any other regulation of application specified in the trial protocol, and best financial practices. The business promoting the project may also interrupt or terminate its trials and tests for technical reasons, any other reason that hinders continuation or once the objectives have been achieved.
Exit: at the end of the trial and tests period , the competent authority will need to evaluate the results and draw up a memorandum of impact of the project, which will later serve as a basis for the regulator to consider (a) adjustment or removal of any regulatory barriers to certain activities, (b) creation of a specific regulation governing the scope tested by the project, or (c) granting of authorisation to the business promoting the project. In the event the latter option takes place, it is expected for the periods for granting licenses to be reduced by half.
What happens now?
Once the Spanish Parliament approves the Draft Bill, the sandbox will be a tangible reality. Business or entities wishing to participate in the first call for the sandbox must therefore begin to:
(i) seek advice on which specific form of sandbox, if any, is most appropriate for their project, and
(ii) prepare the corresponding application memorandum, which is important as it is essentially the vehicle to access the sandbox.
Please get in touch if you have any concerns or need clarifications or any help with applying to the sandbox or preparing the application memorandum.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.