Competition policy implications of regulatory sandboxes in the EU

Cristina Poncibò - University of Turin;

Laura Zoboli – University of Warsaw

-- Our recent paper, “Sandboxes and Consumer Protection: The European Perspective”, appearing in IJCLP, 8: 1-22 (2020) questions the impact of experimentation in competition policy in innovative and fast-developing digital markets. Specifically, it focuses on the case-study of competition and Fintech regulatory sandboxes in the European Union (EU).

A regulatory sandbox is a framework set up by a regulator to allow small-scale, live testing of innovations by private companies in a controlled environment under the supervision of the regulatory authority (and operating under a special exemption, allowance, or other limited time-bound exceptions). Regulatory sandboxes gained prominence in the financial services sector (‘fintech’), but have since expanded to a wide range of sectors, including transport (drones, autonomous vehicles), energy (smart meters), health (mobile health apps), and the ICT sector itself (5G deployment) (OECD 2018b, Research Centre for Autonomous Road Vehicles 2018, Office for Gas and Electricity Markets 2018, CRC 2020).

Competition Law scholars have not fully explored the relationship between competition law and regulatory sandboxes, while regulators assume that sandboxes promote – in principle – competition between companies. In particular, the paper aims at analysing these regulatory and competition tools by relying on a comparative approach to explore and compare selected solutions from the EU. As of January 2020, seven regulatory sandboxes operate in the EU and many further have been approved but not activated or are under discussion. The European Supervisory Authorities (ESAs) joint report on innovation facilitators (regulatory sandboxes and innovation hubs) published in January 2019 comments the five regulatory sandboxes active in the EU at that time (Denmark, Lithuania, Netherlands, Poland, United Kingdom) and it clarifies that all the competent authorities declared that their regulatory sandboxes followed the statutory objectives of contributing to financial stability, promoting confidence in the financial sector and protecting consumers.

By developing sandboxes, authorities are trying to overcome the failures of traditional regulation, especially with respect to banking and financial services. The debate on the relationship between competition and regulation has acquired a leading role in the relevant literature. Recurrent questions need to be addressed, i.e. can we consider competition law enforcement an alternative to regulation or are the two of them close relatives that should coexist? Under what conditions should competition law be preferred over regulation? What is the level of distortion of competition that necessarily requires ex ante regulation?

Sometimes different objectives pursued by regulation and by competition policies cause tensions between the two, but actually in most cases the instruments of competition and regulation are complementary. One needs to consider that ex ante regulation can reduce ex post competition issues, but it will not exclude it. The contrary does not apply: under certain conditions, a market can rely only on competition law – without the need of regulation. However, when a structural competition problem persists, regulation is indeed necessary.

In our view, the shift towards testing and prevention should be considered an interesting development with respect to the past, with the EU having shown a tendency toward over-regulation to preserve the internal market. However, this approach does not necessarily represent a novelty where the EU acquis primarily concerns ex-ante regulation, including, for example, pre-contractual information disclosure and right of withdrawal in consumer contracts.

In light of the comparative analysis developed, the paper concludes by pointing out how the emergence of policy experimentalism in the field is changing the way competition law is applied in the relevant market for FinTech services. The EU Parliament Study on Sandboxes (2020) noted that, by relying on sandboxes, regulators can “inform long term policy making through learning and experimentation” (p. 24). In our paper, we question the theoretical background of this approach (par.) and, specifically, its impact in the field of competition law. Such an approach implies the focus from ex post enforcement to ex ante regulation, assigning to regulators the role of market gatekeepers and finally granting a prominent role to consumers who join the “experiments” (i.e. regulatory sandboxes).

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