As financial technology startups become an immense part of the global financial system, an appropriate environment is required to understand and leverage opportunities presented by new entrants. Regulatory Sandboxes became a universal framework, in which regulators, financial institutions, entrepreneurs and industry professionals can interact and better understand each other.
Among the most important benefits of Regulatory Sandboxes are reduced time to market, opportunity to contain consequences of failure, enhanced access to capital, curated quality of products reaching national markets, regulatory relief and assurance of the best solution for the end-user.
Over the past couple years, a few international financial authorities in collaboration with financial institutions have launched regulatory sandboxes, creating safe environments to take risks. Let's look at some of the most important initiatives starting with the most recent ones.
On the second day of November, Abu Dhabi Global Market (ADGM), the International Financial Centre in Abu Dhabi, launched its Regulatory Laboratory (RegLab) with the implementation of its FinTech legislative framework with effect from November 2, 2016. This follows ADGM’s announcement in March 2016 to develop Abu Dhabi as the FinTech hub in the MENA region, and after an extensive consultation and engagement with local and global FinTech industry stakeholders.
ADGM’s RegLab is a tailored regulatory regime for FinTech participants. It is designed to foster innovation within the UAE financial services market for both new market entrants and existing financial institutions.
By taking into account the unique business model and risks of the FinTech participant and customizing the test boundaries and regulatory requirements accordingly, the RegLab allows the participant to develop and test its FinTech proposition in a safe environment while not putting an undue regulatory burden on the participant. As the first of such initiatives in the region, ADGM’s RegLab authorizes FinTech participants for a period of up to two years to develop and test their FinTech proposition.
Richard Teng, Chief Executive Officer, FSRA of ADGM commented in the official press release, saying, “We are very excited to launch the ADGM RegLab and it is encouraging that interests have been pouring in since we announced our plans. ADGM’s commitment to and (the) pursuit of innovation have always been part of its DNA and culture as an International Financial Centre serving the business and financial aspirations of Abu Dhabi and the MENA region. <...> We welcome FinTech applicants from the MENA region and beyond to take advantage of this platform to develop and fulfill their aspirations. Firms and stakeholders can continue to rely on ADGM to help them navigate through the challenging environment of today and tomorrow and accelerate their business growth in this region.”
At the end of October, the Ontario Securities Commission (OSC) announced the launch of OSC LaunchPad, the first dedicated team by a securities regulator in Canada to help FinTech businesses navigate securities law requirements and accelerate time-to-market.
OSC LaunchPad will provide direct support to eligible new and early-stage FinTech businesses that provide innovative services, products and applications of benefit to investors. The support will be tailored to each business, allowing for meetings with the OSC LaunchPad team on navigating the regulatory framework, flexibility around current regulatory obligations, or informal guidance at an early stage on potential securities regulation implications. In appropriate cases, the OSC will consider time-limited registration or exemptive relief for innovators to test their products, services and applications.
As Maureen Jensen, Chair and CEO of the OSC, commented in the official press release, “This is an exciting opportunity for Canadian innovators. With OSC LaunchPad, emerging FinTech businesses now have an opportunity to work with securities law experts from day one. This initiative reflects the OSC’s commitment to regulation that is in step with innovation.”
The OSC will apply its learnings from OSC LaunchPad more broadly in order to modernize regulation for similar businesses. To this end, the OSC will establish a FinTech advisory committee to further understand the unique issues faced by these startups:
- In November, the Australian Securities and Investments Commission (ASIC) and the Ontario Securities Commission (OSC) signed an agreement, under which ASIC and OSC will refer to one another those innovative businesses seeking to enter the other's’ market. The regulators may provide support to innovative businesses before, during and after authorization to help reduce regulatory uncertainty and time to market.
The agreement follows the creation of the Innovation Hub at ASIC in April 2015 and the OSC LaunchPad in October 2016. These initiatives were established to help businesses with innovative ideas navigate financial/securities regulation, support them through the authorization process and ease their engagement with the regulator.
- On October 21, ASIC also signed an agreement with the Capital Markets Authority of Kenya (CMA), the most innovative capital markets regulator in Africa, which aims to promote innovation in financial services in their respective markets.
The agreement sets up a framework for cooperation between the CMA and ASIC in the expanding space of innovation in financial services. The parties have agreed to share information in their respective markets including on emerging market trends and regulatory issues arising from the growth in innovation.
Mid-October, Bank Negara Malaysia issued the Financial Technology Regulatory Sandbox Framework setting out the requirements for participating in the regulatory sandbox for innovative startups. The bank seeks to provide a regulatory environment that is conducive for the deployment of FinTech. This includes reviewing and adapting regulatory requirements or procedures that may unintentionally inhibit innovation or render them non-viable. As part of this process, the Financial Technology Regulatory Sandbox Framework is introduced to enable innovation of FinTech to be deployed and tested in a live environment, within specified parameters and timeframes.
The sandbox is designed for financial institutions either on their own or in collaboration with a FinTech company or FinTech companies, which intend to apply or have applied for the bank’s approval to participate in the sandbox.
In considering an application to participate in the sandbox and the types and extent of regulatory flexibilities that may be accorded to the financial institutions or FinTech companies operating in a sandbox, the bank will take into account, among others, the following: 1) the potential benefits of the proposed product, service or solution; 2) the potential risks and mitigating measures; and 3) the integrity, capability and track record of the financial institutions or FinTech companies.
As reported by The Nation at the end of September, the Bank of Thailand committed to open the way for financial technology product experimentation under its regulatory “sandbox” in Q1 2017, in the hope that FinTech developers applying to participate can receive licenses quickly.
Vireka Suntapuntu, Senior Director of the Financial Institution Applications Department, shared that the central bank was holding an online public hearing via its website about the regulatory sandbox until October 15, before announcing the opening up of the sandbox to commercial banks as the first group that would be allowed to join the scheme in the first quarter of next year.
The regulatory sandbox is suitable for banks, non-bank FinTech developers and technology firms that have sufficient capital and human resources, while startups who are FinTech beginners should join the incubator programs offered by financial institutions or the Fintech Club before joining the sandbox.
The regulatory sandbox will ensure that the Bank of Thailand, banks and FinTech operators share information and understanding in regard to the regulations. BOT would ease some regulations if the experiment found them to be barriers to the competitiveness of FinTechs and banks. The sandbox will help banks and non-bank FinTech businesses understand how to develop products and services that comply with the regulations, thus enabling them to quickly receive licenses from the BOT.
Launched at the beginning of September, FinTech Supervisory Sandbox allows banks to conduct testing and trial of newly developed technologies and applications on a pilot basis. Within the Sandbox, banks can try out their new FinTech products without the need to achieve full compliance with the HKMA’s usual supervisory requirements. This will enable banks to gather real-life data and user feedback on their FinTech products or services more easily and in a controlled environment so that they can make suitable refinements to their products before the full launch.
The HKMA does not intend to stipulate an exhaustive list of the supervisory requirements that may potentially be relaxed within the sandbox. Examples of these requirements include security-related requirements for electronic banking services and the timing of independent assessment prior to the launch of new technology services.
On September 2, Bank of Indonesia launched five payment system initiatives, among which was an announcement of a commitment to developing financial technology by promoting innovation and healthy competition within a prudent corridor. To that end, Bank Indonesia will release various FinTech policies:
- FinTech Office
A unit tasked with evaluating, assessing and mitigating risk, as well as initiating FinTech based research. In addition, the FinTech Office will also serve as a collaborator for the industry to ensure synergy and harmony amongst the regulators.
- Regulatory Sandbox
A laboratory available to business players and regulators to test products and business models. The Bank Indonesia Regulatory Sandbox will also facilitate innovation and test upcoming policies. Bank Indonesia will launch the FinTech Office and Regulatory Sandbox shortly.
At the beginning of June, the Monetary Authority of Singapore released a consultation paper on the FinTech Regulatory Sandbox Guidelines explaining the importance of building and growing a smart financial center with a regulatory environment that is conducive to the innovative and safe use of technology.
The “regulatory sandbox” will enable financial institutions (FIs) as well as non-financial players to experiment with FinTech solutions in the production environment but within a well-defined space and duration.
Ms. Jacqueline Loh, Deputy Managing Director of MAS, commented in the press release, “MAS aims to provide a responsive and forward-looking regulatory approach that will enable promising FinTech innovations to develop and flourish. The sandbox will help reduce regulatory friction and provide a safer environment for FinTech experiments. We believe this will give innovations a better chance to take root.”
For the duration of the regulatory sandbox, MAS will relax specific regulatory requirements which an applicant would otherwise be subject to.
Recognizing that failure is a healthy part of experimentation, MAS believes that the purpose of the regulatory sandbox is to provide appropriate safeguards to contain the consequences of failure for customers rather than to prevent failure altogether.
Solutions are proposed to be assessed in the regulatory sandbox on criteria such as the extent of innovativeness of the FinTech solution, whether the applicant has the intention and ability to deploy the solution in Singapore on a broader scale as well as whether the solution brings benefits to consumers and/or the industry.
In March, the Australian Securities and Investments Commission released an announcement that in collaboration with the government, ASIC will be working on the development of a ‘regulatory sandbox’ for Australian FinTech.
As Hon Scott Morrison, Treasurer of the Commonwealth of Australia, commented, “As Treasurer I want to help create an environment for Australia’s FinTech sector where it can be both internationally competitive and play a central role in aiding the positive transformation of our economy.”
The government aims to develop a world-leading ‘regulatory sandbox’ in Australia that will enable companies to manage regulatory risks during testing stages, reducing the cost and time to market products.
“The Turnbull Government wants to offer home‑grown and offshore FinTech innovators an opportunity to develop and refine new products and services in the Australian market through a regulatory system that allows them to be frictionless through their scale journey while still becoming regulatory match fit for deployment into domestic and global markets,” stated on the official website of ASIC.
The government will allocate $200,000 for promoting the country internationally as a FinTech destination and to highlight the commercial opportunities of the world’s best regulatory sandbox where innovators can test and refine their ideas.
The regulatory sandbox will allow startups to test their ideas for up to six months with a limited number of retail clients subject to prescribed investment thresholds and restrictions on the types of services eligible for testing. ASIC will consult on how to maintain consumer protections while still allowing innovators to test their ideas and business models.
The Financial Conduct Authority regulatory sandbox is part of Project Innovate, an initiative that kicked off in October 2014, to help us encourage innovation in the interests of consumers and promote competition through disruptive innovation.
The eligible applicants are offered a tailored authorization process (restricted authorization) in the testing phase; individual guidance for firms testing ideas that do not easily fit into the existing regulatory framework and in some cases, waivers or no enforcement action letters.
Tracey McDermott, Acting Chief Executive at the FCA, commented, “Supporting innovation is an essential part of our role in promoting competition in the interests of consumers. Our aspiration is that the sandbox not only enables innovative ideas to be tested and brought to market but also helps to reduce the time and the cost of getting them there.”
With the regulatory sandbox, the authority aims “to create a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms in a live environment without immediately incurring all the normal regulatory consequences of engaging in the activity in question.”