By Jamari Mohtar
Across the Straits
Focus Malaysia | Oct 14, 2017
As the saying goes, necessity is the mother of invention. But in today’s world of financial technology (fintech), a more apt proverb would be “sandbox is the father of innovation”. It’s high time the father gets recognition too!
Who would have thought that a child’s play area – the sandbox – would become the buzzword for financial regulators to encourage innovations in fintech that will make their country a smart financial centre, which in turn is a subset of a smart nation.
As the fintech industry continues to grow, regulators around the globe are starting to sit up and take notice. Over the last one and half years, a new trend in financial services regulation – the regulatory sandbox – has emerged.
Britain was the first to launch the regulatory sandbox in May last year. Since then, regulators in, among others, Singapore, Hong Kong, Switzerland, Thailand, Abu Dhabi, Australia, Canada and Lithuania have adopted similar frameworks. Not to be outdone by a pre-Brexit UK, the European Union (EU) is contemplating proposals for a possible regulatory sandbox.
I first heard about this sandbox thingy from my Singaporean lawyer friends in the course of our discussion on the inadequacy of the current laws to cope with crypto currencies, smart contract, block chain technology and Initial Coin Offering because of the disruptive nature of all these phenomena.
When it comes to regulatory sandbox, Singapore is on the ball when the Monetary Authority of Singapore (MAS) launched it in June last year, just a month after Britain.
The rationale for launch is that emerging financial products or services are becoming more sophisticated and there may be uncertainty over whether the innovation meets regulatory requirements.
Where it is less clear whether a new financial product or service complies with legal and regulatory requirements, some financial institutions (FIs) or start-ups may err on the side of caution and choose not to implement it. Thus promising innovations may be stifled and opportunities missed.
Hence, MAS is encouraging more fintech experimentation so that promising innovations can be tested in the market and have a chance for wider adoption in Singapore and abroad.
Regulatory sandbox will enable FIs as well as fintech players to experiment with innovative financial products or services in the production environment but within a well-defined space and duration. It shall also include appropriate safeguards to contain the consequences of failure and maintain the overall safety and soundness of the financial system.
Sandbox is a concept borrowed by regulators from the world of software development. It enables developers to test a technological proof of concept prior to a full-scale public release, and provides a firm with the ability to amend and improve products iteratively based on feedback, and before the firm has invested significant retrospective costs in a project.
Experiment with real customers
In a regulated sector such as financial services, this iterative approach can be difficult for firms to replicate, especially for startups, which usually do not have regulatory permissions that are needed to conduct real-world tests.
By allowing new firms to experiment with real customers in a regulatory sandbox, regulators are hoping to eliminate some of the temptations for firms to rely on loopholes or an aggressive reading of financial services rules in order to avoid the scope of regulation in their testing phase.
Hence, the sandbox is designed to create a “safe space” where firms can enter the financial services market and generate new ideas within a flexible regulatory control and support.
Such regulatory sandboxes may not only attract start-up firms, but also may be useful for more established market players which are considering launching innovative new products that do not fall within the framework of existing financial services regulation. These include larger firms in the banking, payment services and asset management sectors
In November last year, MAS issued guidelines along with a template application form for applicants who intend to take part in a regulatory sandbox.
There is no limit to the number of firms that can join the MAS’ sandbox. The regulator will publish the name of a successful applicant, along with the start and expiry dates of the sandbox.
MAS aims to make Singapore a smart financial centre by promoting the use of innovative and safe technology in the financial sector. The objective is to encourage more fintech experimentation within a well-defined space and time where MAS will provide the requisite regulatory support so as to increase efficiency, manage risks better, create new opportunities and improve people’s lives.
When a company applies for participating in the regulatory sandbox, MAS will ask whether:
- Its fintech idea is similar to existing solutions in Singapore;
- Applicant does not do due diligence to test and verify the viability of its fintech solution;
- it is sufficient to reasonably and effectively experiment with the solution in a laboratory or test environment; and
- applicant does not have the intention to deploy the fintech solution in the city-state more broadly after exiting the sandbox.
If the answer to all the above questions is in the affirmative, the application will be rejected. But if all the answers are in the negative, MAS will have a further six evaluation criteria in finally accepting an application based on:
- Solution is technologically innovative;
- Solution addresses a problem or brings clear benefits to consumers;
- Test scenarios and outcomes clearly defined;
- Boundary conditions defined for example sample set of 50 customers;
- Major forseeable risks arising from fintech idea have been assessed and mitigated; and
- There is an exit strategy in the event the solution is not feasible.
Customers beware
The successful sandbox company will have to clearly inform customers that it is operating in the sandbox; disclose the key risks associated with the product or service, as these relate to non-delivery or underperformance; and customers will need to acknowledge that they have read and understood these risks.
Meanwhile, MAS through MoneySense, which is a national financial education programme for Singapore, has advised Singaporeans who are thinking about purchasing a product or engaging the services of a company that is operating in the sandbox to be aware, among others, that the company is not required to comply with some of the usual regulatory requirements imposed for providing financial products and services to customers.
Also, by participating in any sandbox experiment, consumers may not be able to seek help from consumer protection schemes or the deposit insurance scheme/policy owners’ protection scheme.
Jamari Mohtar is a veteran journalist who used to live and work in Singapore. Comments: editor@focusmalaysia.my
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