For Innovation in FinTech, Gujarat-based IFSCA Introduces Framework for Regulatory Sandbox

The International Financial Services Centres Authority (IFSCA), with an objective to develop a world class FinTech hub at the IFSC located at GIFT City in Gandhinagar (Gujarat, India), endeavours to encourage the promotion of financial technologies (‘FinTech’) initiatives in financial products and financial services across the spectrum of banking, insurance, securities and fund management. 

It is to be noted that IFSCA is a statutory authority established by Government of India and it acts as a unified authority to regulate all financial services in International Financial Services Centres (IFSCs) in India. About IFSCs, it means that financial centres that cater to customers outside their own jurisdiction are referred to as international (IFCs) or offshore Financial Centers (OFCs). All these centres are ‘international’ in the sense that they deal with the flow of finance and financial products/services across borders.

As a step towards attaining this vision, IFSCA has introduced a framework for “Regulatory Sandbox”. Under this Sandbox framework, entities operating in the capital market, banking, insurance and financial services space shall be granted certain facilities and flexibilities to experiment with innovative FinTech solutions in a live environment with a limited set of real customers for a limited time frame. These features shall be fortified with necessary safeguards for investor protection and risk mitigation. The Regulatory Sandbox shall operate within the IFSC located at GIFT City.

All entities (regulated as well as unregulated) operating in the capital market, banking, insurance and pension sectors as well as individuals and startups from India and FATF compliant jurisdictions, shall be eligible for participation in the Regulatory Sandbox. Entities desirous of participating in the sandbox to showcase their innovative FinTech solutions, concepts and business models shall apply to IFSCA.

IFSCA shall assess the applications and extend suitable regulatory relaxations to commence limited purpose testing in the Sandbox. The details on the eligibility criteria, the application and approval process and other operational aspects of the Sandbox have been provided in the circular.

As an additional steps towards creating an innovation-centric ecosystem in the IFSC, IFSCA has proposed the creation of an “Innovation Sandbox”, which will be a testing environment where FinTech firms can test their solutions in isolation from the live market, based on market related data made available by the Market Infrastructure Institutions (MIIs) operating in the IFSC. The Innovation Sandbox will be managed and facilitated by the MIIs operating within the IFSC.

Further details on the framework for Regulatory Sandbox are available on the IFSCA website at the URL: https://ifsca.gov.in/Circular

For Fintech Firms to Test their Solutions, SEBI Releases Framework for Regulatory Sandbox

Capital markets regulator Sebi on Friday released guidelines for the regulatory sandbox, enabling entities regulated by the watchdog to test their new solutions in a live environment and on a limited set of real customers with necessary safeguards.

The move is aimed at encouraging adoption and usage of financial technologies to further develop and maintain a transparent securities market ecosystem, according to Sebi.

To encourage innovation with the minimal regulatory burden, Sebi said regulatory relaxations from various regulations may be provided after analyzing specific sandbox testing applications.

Under the guidelines, entities regulated by Sebi will be granted certain facilities and flexibilities to experiment with financial technologies solutions in a live environment and on a limited set of real customers for a limited time frame, a circular said.

These features will be fortified with necessary safeguards for investor protection and risk mitigation, Sebi said in a circular.

Coming out with detailed guidelines pertaining to the functioning of the regulatory sandbox, Sebi said all entities registered with the regulator shall be eligible for testing in the regulatory sandbox.

"The entity may either on its own or engage the services of a FinTech firm. In either scenario, the registered market participant shall be treated as the principal applicant," Sebi said.

On regulatory exemptions, the regulator said it shall "consider exemptions/ relaxations, if any, which could be either in the form of a comprehensive exemption from certain regulatory requirements or selective exemptions on a case-by-case basis, depending on the FinTech solution to be tested."

Within the overarching principles of market integrity and investor protection, no exemptions would be granted from the extant investor protection framework, Know-Your-Customer (KYC) and Anti-Money Laundering (AML) rules.

Regrading eligibility criteria of the project, Sebi said the solution should be innovative enough to add significant value to the existing offering in the Indian securities market and should have a genuine need for live testing the solution on real customers.

In addition, before applying for testing in sandbox, limited offline testing of the solution should have been carried out by the applicant, the solution should offer direct benefits to users and there should be no risks to the financial system.

Besides, the eligibility criteria also include the test readiness of the solution and the applicant should demonstrate the intention and ability to deploy the solution on a broader scale.

The applicant, upon ensuring that the eligibility criteria are satisfied, is required to submit the application form in the format prescribed by Sebi. It also gave a detailed application, approval and evaluation process.

Sebi has also come out with a framework on submission of test-related information and reports, obligations of the applicants towards the user and extension or exit from the sandbox.

The regulator has also listed out specific conditions under which the approval to participate in the sandbox may be revoked.

In addition to revocation of approval, appropriate actions may be initiated against the applicant if it facilitates undermining of KYC principles, violation of user's or investor's privacy, promotion of the sale of fraudulent or illegal products, services, promotion of mis-selling of products or services, violation of AML norms, creation of risk to financial stability and theft of intellectual property.

RBI to Setup Regulatory Sandbox for Fintech and P2P Lending Startups, Co.s

Reserve Bank of India (RBI) is said to be working on a regulatory sandbox for fintech companies can test out their product before releasing it to public usage. This will also involve bypassing RBI regulations, though for testing purpose only.

Regulatory sandboxes typically involve temporary relaxations or adjustments of regulatory requirements to provide a "safe space" for startups or established firms to test new technology-based financial services in a live environment for a limited time, without having to undergo a full authorization and licensing process.

Gautam Chatterjee, principal adviser to the Department of Statistics and Information Management at the RBI, said, "More products are coming in the market. To guard against the creative vulnerabilities, the idea is to bring in a regulatory sandbox where anybody can bring in a new product and it can be first tested before going to public."

"Today, all departments in the RBI are relying on data analytics. A regulatory sandbox, to separate running computer programs to mitigate system failures and software vulnerabilities from spreading, will help in product innovation as more products are coming in frequently," said Chatterjee to Economic Times at an event.

Governments, especially in developed economies, are striving to encourage online fintech innovation and for this the regulatory sandbox concept is taking off worldwide. The U.K. was the first country to implement a regulatory sandbox, announcing the approach in 2015 and approving the first sandbox fintech services in 2016. This was followed by Australian sandbox, introduced in December 2016, differs from the approach in the U.K. and some other countries in that it doesn’t require companies to apply for individual approval.

Additionally, RBI is also setting up data science labs to keep pace with innovation in the digital lending space including online P2P lending.

"A data science lab will be opened in the RBI with a mixed team of engineers, economists and statisticians and they will be going through internal data of each vertical," said Chatterjee.

RBI has set up an inter-regulatory working group to study regulatory issues relating to fintech and digital banking in India.

As per the RBI, P2P Lending is a form of crowd-funding used to raise loans which are paid back with interest. Currently, Indian P2P has more than 30 players, and the market size is slated to cross US$4-5 billion by 2023. The VC activity in the sector is also high with around USD 221 Mn flowing in the last two years. Naturally, RBI issued final guidelines in Oct’17 for P2P Lending in order to better regulated and also make it trustworthy.

It may also be recalled that last month, RBI has also set up a new unit to supervise, oversee its efforts in emerging technologies including cryptocurrency, blockchain and Artificial Intelligence (AI).