On August 31, 2020, the Financial Services (Fintech Regulatory Sandbox) Regulations 2020 came into force, significantly enhancing the British Virgin Islands regulatory framework and providing room for innovation in the fintech sector. The sandbox is a controlled environment for fintech businesses to conduct live-testing with temporarily adjusted regulations. Fintech developers can operate within the sandbox for a set time period and with limited reach, without having to go through the usual full process of regulatory authorization.
The Sandbox environment allows for effective early testing of fintech products to identify areas for improvement to safeguard against error in actual deployment. It also allows the Financial Services Commission (FSC) to provide clarity on whether a new financial product or service complies with legal and regulatory requirements. Seeing fintech businesses deployed in a controlled environment improves the overall efficiency of a fintech system and encourages further innovation.
The new regulations provide for a three-part lifecycle. During the consideration period, the service provider makes an application that can be refused by the FSC, or accepted for participation in the Sandbox. Even after acceptance, the FSC may revoke the approval after further evaluation under Regulation 16. If allowed to launch the service within the sandbox as a new participant, the provider can deploy the service in the sandbox (sandbox participant stage) for an 18-month period, with a possible six-month extension. An application for extension must be made at least 30 days before the end of the period specified for testing when the application for participation was approved.
Finally, the provider will exit the sandbox either becoming a licensed financial services provider, or, if unable to obtain a license, the provider must wind down the service. The sandbox participant must give 60 days' notice to the FSC before exiting the Regulatory Sandbox.
How To Apply for the BVI Fintech Regulatory Sandbox
The application to become an approved Sandbox participant must include a written proposal for the use of innovative fintech in a financial services business by improving provision, enhancing risk management, addressing shortcomings, or providing new opportunities. The application must be accompanied by a detailed and comprehensive business proposal, to include test scenarios carried out by the applicant, the maximum number of clients the applicant wishes to engage while participating in the Sandbox, a risk assessment, and a description of the financial, technological, human, and other resources that the applicant will utilize to support participation in and testing within the Sandbox. The applicant must also document its strategies for exiting the Sandbox.
Who is Eligible
The BVI Fintech Regulatory Sandbox is open to participation by existing BVI licensed financial service providers, as well as startups. The FSC envisages applications in the credit sector, e.g., peer to peer lending, in payments such as eWallets and mobile payment services, and also in investment management, securities, and insurance fintech. An overview of key factors that the FSC will use in its evaluation process can be found here.
Recordkeeping, Reporting, and Risk Mitigation
Potential applicants should pay attention to Regulation 12, which sets out recordkeeping and reporting requirements for Sandbox participants, as well as the client disclosure requirements of Regulation 13. In addition, the Regulations do not provide for limitation of liability or immunity from regulatory action or other prosecution. In fact, Regulation 11(2) specifies that participants are required to adopt appropriate measures to address potential risks, including the prevention of money laundering, as well as terrorist and proliferation financing.
Requiring these measures to safeguard against international financial crime allows for maximum flexibility for the regulator to assess what level of risk controls are appropriate on a case-by-case basis. The regulator can then ensure adherence to international standards, rather than providing a blanket exemption from the existing regulatory framework. The process promotes integrity and stability in the financial system. The flexible approach is not unusual. In fact, in certain jurisdictions regulators employ a legislative "no-action letter" procedure for just this purpose. While no explicit procedure for this exists in the BVI Regulations, the framework does allow the regulator to address these matters, in a comprehensive manner, during the application process.
Prospective Sandbox participants should therefore pay particular attention to provisions to mitigate against these risks in their application proposal and have detailed discussions with regulators on these matters in relation to the sufficiency of the mitigation measures proposed. In the same vein, the solicitation and contractual documents that prospective participants will use with clients during the Sandbox participation phase should have clear, easily understood, and rigorous provisions for the limitation of loss and liability.
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