“Sandboxes.” “Greenhouses.” “Pilot tests.” “Labs.”

These are not words we normally associate with financial regulation. Yet suddenly, all over the world, regulatory agencies are giving these novel names to a new,  unconventional kind of initiative.

The break from tradition is being driven by a realization:  they are going to need to find new ways to do their jobs well, in the face of fast-moving technology change and fintech innovation.

My guest today oversees one of these fascinating programs -- Abu Dhabi’s Reglab. He is Wai-Lum Kwok, Executive Director for Capital Markets at the country’s Financial Services Regulatory Authority.

The world’s most famous regulatory sandbox is run by the UK’s Financial Conduct Authority (which was inspired, in turn, by the CFPB’s Project Catalyst in the United States). We will have a podcast this fall with the FCA, which has just put out a new progress report. Speaking as a former regulator myself -- I was once Deputy Comptroller of the Currency -- I view the FCA’s effort as a remarkable case of regulatory leadership. (Here’s an article I wrote about it for Fintech Law Report.)

When the FCA’s initiative was launched it quickly caught the attention of other regulators around the world. As of today, approximately twenty countries have some form of innovation hub or sandbox underway or on the drawing board, including notably Australia, Regulatory-Sandbox.aspx"> Singapore, and Hong Kong. The Aspen Institute will soon issue a report with a global overview, which we’ll link to in this episode’s show notes when it’s published.

These sandboxes have a wide variety of designs and specific objectives. As Wai-Lum explains in this episode, the Abu Dhabi initiative accepts a wide range of companies and gives them two years to demonstrate that their innovations will be beneficial and safe. The Abu Dhabi approach, like the UK’s and others, links to a wider national strategy to attract capital and companies wanting to do business in a regulatory climate that welcomes responsible innovation. Some of these countries are cultivating regional and even global leadership positions in fintech.

Note that we recorded today’s episode late last year. In May of 2017, the Abu Dhabi Reglab announced its first cohort of companies.

We had this conversation in the bustling exhibit hall at the Fintech Festival sponsored last fall by the Monetary Authority of Singapore (think about that for a moment -- a central bank ran a 14,000-person fintech meetup, and this year’s will be even bigger).  Our discussion was short, but the topic is one of the most important ones we’ve ever discussed on Barefoot Innovation. I’ve been thinking hard about how regulators are going to keep up with technology innovation in finance, and the answers are not going to be easy. Our regulatory frameworks are designed to be deliberate -- and therefore slow-moving. And to be conservative, and to focus on preventing risk, not fostering change. Some countries have mandates to foster competition, but most, including the United States, don’t. I’ve been researching this challenge in the book and paper I’ve been writing for the past two years as a Senior Fellow at the Harvard Kennedy School Center for Business and Government. Over that period I’ve talked with regulators, innovators, and incumbent companies throughout the United States and all over the world.

I’ve come to an opinion that might be controversial, but here it is. I think regulators will not be able to do a good job of overseeing emerging technology change, unless they create mechanisms for doing empirical testing. I think sandboxes, in some form, are not just helpful, I think they’re necessary.

Of course, it’s far too early to tell how well they will work and which models are best. The regulators running them emphasize that they are figuring this out as they go along. No one thinks sandboxes are panaceas. Nevertheless, the very process of undertaking these experiments is moving a community of regulators forward in deeply understanding fintech innovation -- both its promise and, importantly, its perils.

Despite the sandbox movement sweeping the world, the term sandbox, itself, has fallen out of favor among many in the United States. For one thing, sandboxes sound, well, unserious. For another, there has been talk of using sandboxes to waive or suspend consumer protection rules while companies experiment on real, live human customers. In practice, such suspensions aren’t happening anywhere to my knowledge, but the issue is obviously politically sensitive. (Also, Innovate Finance in London is working on a “virtual sandbox” that could work by modeling innovations using pooled data, so that real consumers would not be affected).

So, fine. Let’s not suspend consumer protections (even though a lot of these laws don’t actually protect people very well). And let’s call these initiatives greenhouses, or pilots, or, as Abu Dhabi does, laboratories. In our conversation, I told Wai-Lum that I too came up with the name “RegLab” for a project I’m working on, exploring the idea of creating a non-profit that could function as an interagency regulatory sandbox in the United States. The U.S. is unique in the world in our dizzingly complex, fractured regulatory structure (five federal financial supervisory agencies, plus dozens of other federal agencies, plus 50 states). We’re going to have to figure out two things -- how to coordinate a coherent fintech regulatory strategy and how to keep up with exponentially growing technology change. If we don’t, we’ll lose our global competitive edge.

There is much more to say on all this -- again, I think it’s one of the most important issues facing the regulatory community -- and we’ll have more shows on it coming up. For now, please listen to my fascinating conversation with Wai-Lum Kwok about the Abu Dhabi RegLab.

More about Wai-Lum Kwok

Wai Lum joined the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) in June 2015.  He heads up the Capital Markets division responsible for admission and supervision of financial market infrastructures and capital market intermediaries.  The division also regulates the offering of securities, collective investments schemes.

Wai Lum also spearheads FSRA’s strategy and efforts to support the supervision of innovation in Financial Technology (FinTech) and development of the FinTech ecosystem in ADGM.

Wai Lum has more than 10 years of supervisory experience.  Prior to ADGM, Wai Lum served as the Director of the Capital Markets Intermediaries Division of the Monetary Authority of Singapore.  Wai Lum graduated from Imperial College, London with an M.Eng in Electrical Engineering and holds an M.Sc in Applied Finance from the National University of Singapore.  He is a CFA charterholder.

More links

•  The Abu Dhabi Reglab -- www.ADGM.com, or email fintech@ADGM.com
•  ADGM’s Reglab consultation paper
•  My podcast on sandboxes with BMO’s Nitish Pandey
• June 2017 Treasury Department  of-Recommendations-for-Regulatory-Reform.aspx">summary of proposed financial reforms including enhanced interagency coordination
• Bill proposed by Congressman Patrick McHenry (in last Congress) to require financial regulators to coordinate on fostering innovation

More for our listeners

Please remember to review Barefoot Innovation on ITunes, and sign up to get email notifications for new podcasts, the newsletter, and blog posts at jsbarefoot.com.  

Also go to jsbarefoot.com to send in your “buck a show” to keep Barefoot Innovation going, and join my facebook fan page. I hope you’ll also follow me on twitter.

Support our Podcast

Meanwhile, watch for a summer of amazing shows, including CFTC Acting Chairman Christopher Giancarlo; John Ryan of the Conference of State Bank Supervisors; and breakfast in London with the one-and-only Brett King. And watch for our special show that I recorded at the ABA’s Regulatory Compliance Conference in Orlando, including a talk with Andy Sandler and one with Gene Ludwig and Allistair Renee of Watson Financial.

Here’s my perhaps counter-intuitive takeaway from the ABA conference:  #ComplianceIsCool!

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