The biggest trend in financial service industry is no longer the huge funding Fintech firms are attracting from VCs. It is the deployment of regulatory sandbox programmes to boost research, innovation, and development in the competitive Fintech sector.
Recently, several countries have initiated ‘regulatory sandboxes’ to facilitate growth in their financial sectors. The Central Bank of Bahrain was the latest to open a regulatory sandbox for fintech firms worldwide to test their technology ahead of live deployment in the Kingdom.
Sadly but unexpectedly, no financial regulator in Africa has joined the train. What are they waiting for or are there no Fintech firms in Africa that can exploit the great innovation opportunities that sandbox programme offer?
The non-adoption of these regulatory sandboxes by African countries shows that our governments are not taking a progressive and proactive approach toward the idea of Fintech innovation.
Thus, it reveals the weaknesses and timidity of the African Fintech ecosystem to demand access to financial data from financial regulators to aid the industry’s innovations and development. Besides, implementing these sandboxes is challenging. It requires multi-stakeholder convening and communication. The question remains as to whether African regulators are ready for multiple stakeholders’ management.
Another challenge is the rigid financial regulatory environment in most African countries. You need flexible regulatory environment to drive innovations. Regulatory sandboxes usually implement set rules that allow trailblazers to test products and business models in a live environment with minimal legal requirements.
However, majority of these programmes have predefined restrictions, such as limitations on clients, time-limit testing, predetermined exceptions, and testing under regulator supervision. Their purpose is to minimize legal uncertainty, improve access to investment, and create rules for new products and business models.
Origin of the Regulatory Sandbox
Arup Kumar Chatterjee from the Asian Development Bank points out that regulatory sandboxes aren’t a new concept, just a new expression of an already existent practice. The Philippines has been deploying such “test and learn” approaches for more than a decade, he explained in a blog post. Rather than issuing predetermined regulations, the country empowered prominent businesses to pilot products and models under close monitoring.
The success of this approach provided proof of the concept that multi-stakeholder communication and convening allows regulation to coincide with innovation. A senior advisor on digital financial services, John Owens, said the original regulatory sandbox originated in 2004 when Philippines telecom, Globe, approached Bangko Sentral ng Pilipinas (BSP), the country’s Central Bank with a proposal to create money independently. Globe was inspired by Smart Communications and created the first mobile money in the Philippines in conjunction with BSP. The bank allowed the company to move ahead under the test and learn approach.
This step was internationally unprecedented: no telecom had issued money without any banking affiliation. Most considered it too risky, especially with concern about money laundering. East Africa, however, quickly followed the Philippines’ example, as did China.
The Global Map of Sandbox Programmes
The Financial Conduct Authority recently selected 31 firms for its second cohort of regulatory sandbox participants, narrowing down the field from an initial list of 77 submissions. In the sandbox’s first phase, 24 firms scaled through out of 69 applications and 18 firms had testing plans approved in October 2016.
In June 2016, the Monetary Authority of Singapore (MAS) proposed guidelines for a sandbox that enabled financial and non-financial institutions to test Fintech solutions in an environment with relaxed regulatory requirements. The MAS examined applicants based on qualities such as ingenuity and ability to distribute the product nationwide. The MAS, Singapore’s stock exchange, and eight local and foreign banks collaborated on a project to utilize blockchain technology for interbank payments.
On February 23, 2017, the Canadian Securities Administrators (CSA) launched a regulatory sandbox initiative that is open to business models focused on energizing the Canadian market. This includes crypto-currency or distributed ledger based ventures, the utilization of artificial intelligence for trading, regulatory technology, and online investment platforms. During the application process, CSA staff may request live environment testing, a business plan, and/or a demonstration of how potential investors can benefit.
The Financial Conduct Authority (FCA) of the UK offers a regulatory sandbox that seeks to clarify applicable rules before proceeding with original idea. It offers participants access to potential waivers and modifications to FCA rules. FCA evaluates applicants by examining the ingenuity of the idea, benefit to consumers, project status, and the need for FCA guidance. It is in two cohorts. The first applications came from 69 companies. Though only 24 were accepted. The application period for the second cohort ended on January 19.
On June 8, 2016, the Australian Securities and Investments Commission (ASIC) issued a formal proposal for a regulatory sandbox with intention to bolster the Australian Fintech industry. It allows ASIC to assist with issues related to ‘speed-to-market’ and meeting the organizational competence requirements of obtaining a license. It allows start-ups to conduct tests on certain financial services for up to six months.
In March 2016, the Switzerland Financial Market Supervisory Authority (FINMA) introduced a new licensing category for innovative companies, along with a license exempt sandbox. The programme is tailored to businesses that conduct some form of banking activity but will limit lending.
On October 18, 2016, Bank Negara Malaysia (BNM) announced its own regulatory sandbox framework in a Discussion Paper. However, its sandbox focused on the proven records of accomplishment of companies applying, and held a preference for start-ups from institutions that collaborated well with others. BNM indicated that, after the completion of the one-year sandbox pilot, it would consider altering regulations to facilitate the successes of new ideas and/or business models that have promising outcomes.
To aid Hong Kong’s aspirations as a competitive financial hub and facilitate development of Fintech in its banking sector, Hong Kong Monetary Authority (HKMA) launched a sandbox on September 6, 2016. Breaking with the trend of other countries, its programme is offered to established banks seeking to explore distributed ledger technology and Fintech solutions. Start-up are prohibited from this programme.
The Bank of Thailand announced in September 2016 that it would push for a Fintech regulatory sandbox with the goal of sharing information and shaping regulation. It encouraged commercial banks to apply first and later, admission would open to non-bank firms and technology companies. Smaller firms are encouraged to join incubators.
In February 2017, Roman Shiiko, economic advisor to the Bank of Russia, announced the rollout of the first phase of a Russian sandbox in which new and inventive global services could be explored and developed. Shikko describes Russia’s initiative as “a major step forward in the creation of an innovation ecosystem in Russia’s young Fintech community.”
In November 2016, Abu Dhabi Global Market (ADGM) invited local and international Fintech firms to test their services in a sandbox under ‘RegLab’ [Regulated laboratory]. This coincides with the implementation of a new Fintech legislative framework in the region with plans to promote the UAE capital as the Middle East’s premier Fintech centre.
ADGM opened in March 2016 with extensive industry stakeholders’ consultation and promised a tailored framework that allows Fintechs to develop, test, and launch products and services in a controlled environment for two years before opening to full regulatory scrutiny.
In 2017, the Central Bank of Bahrain opened a regulatory sandbox for Fintech firms worldwide to test their technology ahead of live deployment in the Kingdom. It provides a virtual space for companies to test their technology, and is open to existing CBB licensees and other local and foreign firms. The testing is nine months with a maximum extension of three months.