Background
In the recent past, the adoption of technology has caused significant disruption in financial services sector and the financial ecosystem as a whole. New age Indian companies are developing various technological solutions to address existing gaps in the financial market including access to credit, adoption of digital payments, sale of financial products on e-commerce platforms, etc. With a view to encourage and support adoption of such technological solutions in a structured manner, three Indian financial services regulators, Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Insurance Regulatory and Development Authority of India (IRDA) have proposed establishment of their respective regulatory sandboxes, which are controlled environments for live testing of new products, processes, or services for which appropriate regulatory relaxations could be considered by the regulators.
The Pension Fund Regulatory and Development Authority had also released the final report of its constituted group on regulatory sandbox, and may issue draft regulations in the near future. The proposals from various regulators on regulatory sandboxes are pursuant to the recommendations made by the inter-regulatory working group on fintech and digital payments set up by the RBI in July 2016. Regulatory sandboxes are intended to encourage innovative use of emerging technology which could potentially benefit Indian consumers, and result in deepening penetration of financial services in India.
Key proposals
The table below outlines the key aspects of regulatory sandboxes proposed to be introduced by RBI, SEBI, and IRDA.
PARTICULARS | RBI | SEBI | IRDA |
Type of fintech solutions |
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Insurance technology solutions which are beneficial to policy holders, including insurance solicitation or distribution, insurance products, underwriting, and policy and claims servicing |
Scope of regulatory relaxations |
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Key eligibility conditions for sandbox testing applications |
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Broad overview of process and timelines |
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SEBI's Innovation Sandbox
In addition to its proposed regulatory sandbox, SEBI has also exercised its powers under the Securities and Exchange Board of India Act, 1992 and the Depositories Act, 1996 to direct stock exchanges, depositories, and registrar and transfer agents to implement a framework for an 'innovation sandbox', under which any person not regulated by SEBI may test fintech solutions for the securities and commodities market by using securities market related data (including data relating to depository holding, KYC, trading, and mutual fund transactions) made available by such exchanges, depositories, and agents. Such data is proposed to be shared for offline testing purposes (outside the live market) through application program interface (APIs) which would be circulated to selected applicants. SEBI has mandated formation of an independent governance body and a steering committee (consisting of representatives of stock exchanges, depositories, and registrar and transfer agents) to supervise the operation of the innovation sandbox, and issue related operating guidelines. SEBI has also prescribed that the entire sandbox participation process must be implemented in a digital environment, and must be completed within a period of 2 years.
Comments
The proposals by various financial services regulators on regulatory sandbox should encourage fintech start-ups and businesses to develop and explore innovative products and services while liaising with the regulators. Financial services regulators are now looking to follow an experimentation-based approach (as against a ban-first, regulate-later approach) to regulation making based on empirical evidence collected pursuant to the testing of technological solutions in the market. This is an encouraging sign. Having said that, the net worth eligibility criteria proposed by RBI and IRDA for participation in the regulatory sandbox may act as entry barriers for genuine fintech start-ups who are still in the stage of tech development, and have not raised investments for their proposed businesses. The proposal by IRDA to limit its regulatory sandbox for a period of 2 years may potentially impede the intended benefits of the sandbox, and affect its continuity in the long term. Overall, the introduction of regulatory sandboxes as a concept in the Indian financial market is an extremely positive development. While the specifics of each sandbox will evolve over time, the regulators should be lauded for taking this promising step.
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