Adaptive regulation and regulatory sandboxes may well represent the future of regulation. The technological disruption caused by the digital transformation in Africa has led to the creation of new products, services, and business models. To such an extent that regulators are hard-pressed to upgrade existing regulations or create new ones. Indeed, not only do they have to integrate the digital innovation that has characterized the past two years and more, but they also must do so fast. In the rapidly evolving African technological and digital ecosystem, adaptive regulation and regulatory sandboxes have already yielded positive and encouraging results, despite their recent implementation.
Regulators are the new industry partners
Digital transformation is creating significant changes, not only in people’s lives but also in the way government institutions operate. How can regulators create and implement regulations that protect citizens and ensure fair markets, while promoting the development of modern technologies and businesses? And all that at a pace that matches that of innovation? Bakul Patel, from the FDA, argues that, in this context of technological innovation, regulators are no longer “just” regulators. According to him, their role has changed to that of a “partner in bringing safe and effective technologies to the table for people to have that high confidence in those technologies.”
Patel’s statement implies the need for collaboration between regulators and the industries they oversee. To keep up with the changes, regulators need to upgrade their technological knowledge and get input and feedback from the relevant stakeholders in the market, like fintech startups. This would help them to understand the products and services the companies offer, and therefore to create appropriate regulations that will serve the interests of all stakeholders, including the consumers.
Overall benefits of adaptive regulation and regulatory sandboxes
According to Deloitte, the following five principles should be taken into consideration when crafting future regulation: adaptive regulation, regulatory sandboxes, outcome-based regulation, risk-weighted regulation, and collaborative regulation. This blog focuses on adaptive regulation and regulatory sandboxes as tools for regulatory authorities to keep up with the pace of innovation in the digital sphere. The World Bank describes regulatory sandboxes as “frameworks set up by regulators that allow fintech startups to conduct live experiments in a controlled environment under a regulator’s supervision.” As for adaptive regulation, the American Enterprise Institute (AEI) defines it as “an approach that allows the industry and the regulator to co-evolve in a customer-driven system”.
The first regulatory sandbox came into being in the UK, in 2016. Since then, the Financial Conduct Authority’s (FCA) sandbox has provided companies with the regulatory input and tools they need to test their products, services, and business models, enter the market faster and ensure that they comply with consumer protection standards. Furthermore, regulators in the UK are now adopting sandboxes that address specific technologies and their related issues. For example, according to PYMNTS, the finance ministry is planning to start testing crypto-blockchain technology, with a view to creating a regulatory environment that is attractive to investors.
Global research carried out by the World Bank shows that a country’s fintech ecosystem can greatly benefit from regulatory sandboxes. Indeed, according to this same research, regulatory sandboxes can help fill the regulatory gap in countries where such a gap exists; support regulatory consensus; facilitate partnerships between startups and traditional financial institutions; enable the development of the fintech market and assist regulators in keeping abreast of fintech trends and innovations. There is also evidence that sandboxes help fintech companies enter the market more easily, enhance competition among these companies and promote financial inclusion. However, this evidence is either mixed or scarce, says the World Bank.
Encouraging beginnings in Africa
Africa jumped on the regulatory sandbox bandwagon two years after the UK. Sierra Leone, for example, is the first African country to have implemented a regulatory sandbox, in 2018, followed by Mozambique. Other African countries that have implemented a regulatory sandbox are Kenya, Rwanda, Mauritius, Ghana, and Nigeria.
But it is the Kenyan regulatory sandbox, implemented by the Capital Markets Authority (CMA), that is currently occupying center stage on the continent. Indeed, it got rave reviews from the African Crowdfunding Association (ACfA). Elizabeth Howard, Regulations Lead at the ACfA, gave it a “resounding 10 out of 10” for its outstanding level of engagement with the relevant stakeholders, its vision, and its potential as an example other African countries can follow. Even though Kenya is technically the third African country to have implemented a sandbox, behind Sierra Leone and Mozambique, Howard reckons it is the first one to have reached such an advanced stage in the implementation process.
When it comes to adaptive regulation, Ghana offers an interesting example. Indeed, the AEI reports that, a few years ago, leading Ghanaian telecom providers MTN Ghana and Broadband Home resorted to partnering with OTT providers that had previously threatened their income. Instead of involving the NCA, MTN and Broadband Home decided to collaborate with the OTTs to find a mutually beneficial arrangement. Such an initiative is also in the interest of the users, who then benefit from both the quality network infrastructure offered by the incumbent operators, and the innovative digital services provided by the OTTs. Following the instructions of its then chairman, the NCA engaged with the operators’ initiative, to see how it could help reconcile competition and collaboration, thus supporting customer-driven change.
One may of course argue that in Africa, adaptive regulation and sandboxes are still in their infancy. However, they have already yielded positive results. In Ghana and Kenya, for instance, they proved successful in supporting regulation against a backdrop of rapid technological innovation. Indeed, they helped create an open, bidirectional communication channel between governments and the private sector, as they did in Europe and other regions of the northern hemisphere.
Would you like to listen to our CEO, James Claude, talk about regulatory sandboxes on CNBC Africa? Click here.