REGULATORY SANDBOX

 

For: Mains

Topics covered:

• What is Regulatory Sandbox?
• What are its benefits and significances?
• Risk involved

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News Flash

The Reserve Bank of India released the final ‘enabling framework for a regulatory sandbox,’ taking into account inputs received after a consultation process that began in April.

The regulatory sandbox allows live testing of new products or services in a controlled or test regulatory environment.

 

Advantages

• The framework will be a positive step for financial technology start-ups.
• It will also help companies looking to innovate in the fast-changing and highly regulated sector.
• It can provide a structured avenue for the regulator to develop innovation-enabling or innovation-responsive regulations.

 

Background

In July 2016, RBI set up an inter-regulatory Working Group (WG) to look and report on the granular aspects of FinTech and its implications so as to review the regulatory framework and respond to the dynamics of the rapidly evolving FinTech scenario.

 

The Regulatory Sandbox (RS)

• RS usually refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may (or may not) permit certain regulatory relaxations for the limited purpose of the testing.
• The RS allows the regulator to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks.
• It is a tool that enables more dynamic, evidence-based regulatory environments.

 

Objective

To foster responsible innovation in financial services, promote efficiency and bring benefit to consumers.

 

Benefits

• Regulators obtain first-hand empirical evidence on the benefits and risks of emerging technologies and their implications.
• Financial service providers (including banks) can improve their understanding of how new financial technologies might work.
• Innovators and FinTech companies can improve their understanding of regulations that govern their offerings and shape their products accordingly.
• Users of an RS can test the product’s viability.
• FinTechs provide solutions that can further financial inclusion in a significant way.
• The RS can go a long way in improving the pace of innovation and technology absorption, financial inclusion and in improving financial reach.
• The RS could lead to better outcomes for consumers through an increased range of products and services, reduced costs and improved access to financial services.

 

Risk involved

• Innovators may lose some flexibility and time in going through the sandbox process.
• Case-by-case bespoke authorizations and regulatory relaxations can involve time and discretional judgments.
• The RBI or its RS cannot provide any legal waivers.
• Post-sandbox testing, a successful experimenter may still require regulatory approvals before the product/services/technology can be permitted for wider application.
• There is potential for some legal issues coming up, such as those relating to consumer losses in case of failed experimentation.

 

Innovative Products

• Retail payments
• Money transfer services
• Marketplace lending
• Digital KYC
• Financial advisory services
• Wealth management services
• Digital identification services
• Smart contracts
• Financial inclusion products
• Cyber security products

 

Innovative Technology

• Mobile technology applications (payments, digital identity, etc.)
• Data Analytics
• Application Program Interface (APIs) services
• Applications under block chain technologies
• Artificial Intelligence and Machine Learning applications

 

Exclusion from Sandbox Testing

• Credit registry
• Credit information
• Crypto currency/Crypto assets services
• Trading/investing/settling in crypto assets
• Initial Coin Offerings, etc.
• Chain marketing services
• Any product/services which have been banned by the regulators/Government of India.

 

Source: RBI

 

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