Published legislation and draft legislation - Spain

Measures for the digital transformation of the financial system

Draft bill. Ministry for the Economy & Business

On July 10, the Ministry for the Economy & Business published a draft bill of measures for the digital transformation of the financial system.

The regulation supports the digital transformation of the economy by monitoring the risks that financial innovation may trigger. It reinforces legal certainty, such that the protection of the financial services consumer and the integrity of markets are not affected, preventing the financial system from being used to launder money and finance terrorism.

The draft bill consists of four sections which cover different areas of the new digital environment. Of these, Section II, regulating the controlled testing space, is particularly important. This space, known as the "regulatory sandbox" has the following legal definition: "all the legal dispositions that provide protection for tests that are part of a controlled and restricted pilot project". To this end, the tests are carried out under supervision by the competent authorities, their scope, duration and characteristics having been defined beforehand, ensuring the highest level of guarantee when the participation of real clients is needed.

Legislation of project testing and protocol

The rules for tests are specified in the regulation and in the protocol for tests agreed between the developer and the supervising authority, once the project has been awarded a preliminary favorable assessment. This protocol will contain the pilot project's conditions:

  • Limits over volume and testing time
  • Information to be given to the authorities and how to access it
  • Project phases and targets for each phase, together with the test's scope and duration
  • Resources the developer must have to conduct the tests
  • System of guarantees to cover possible liability

The testing protocol, compliance with which is obligatory for participants, will ensure the financial consumer is protected; the consumer must have been given the information beforehand, must give their consent, and may abandon the project whenever they wish. Throughout the testing period, the developer and the supervisor will coordinate with one another, and once the testing has ended, the developer will have to submit a report on the results.

Requirements for access to the regulatory sandbox

  • Projects must have a technology-based financial innovation and be at a sufficiently advanced stage that they can be tested. The regulation defines this type of innovation as one that can give rise to new business models, apps, processes or products that have an impact on financial markets, the provision of financial and ancillary services or the performance of public functions in the financial arena.
  • Innovative projects must also offer a potential added value in at least one of the following areas:
    • Be designed to improve regulatory compliance by perfecting or standardizing processes or other instruments
    • Represent a potential utility for users of financial services: enhanced quality, better conditions of access or availability of financial service provision, or increased protection for customers
    • Increasing the efficiency of institutions or markets
    • Providing mechanisms for improving regulation or better exercise of financial supervision

Access to the sandbox does not equate to authorization for conducting an activity or providing professional services on a permanent basis. Once the tests have been completed, the developer will prepare and submit to the supervisory authority a report assessing the results and the pilot project as a whole, and at this point may request permission to begin their activity.

Other important issues

The regulation makes provisions for a testing committee to be set up to coordinate the activity, stipulating that authorities should cooperate with one another, and establishes specific communication channels between the supervisory authorities and individuals involved.

Finally, the bill requires the General Secretariat of the Treasury & Foreign Financing to draw up an annual report which summarizes the new technological developments, international performance and the effects of these innovations on financial stability, among others.

If this regulation is finally passed, technological innovation applied to financial services will be given a boost insofar as it gives the customer a framework of protection, it helps to modernize the Spanish economy within the global digital environment and it encourages greater efficiency on the part of financial institutions.

Continue reading the magazine nº 16