Sandbox helps businesses and regulators innovate

By Archana Tewary and Arjun David Alexander, J. Sagar Associates

A regulatory sandbox is an enabling interface or infrastructure constructed by a regulator, to conduct live tests on new financial innovations and technology, in which, the regulator may permit certain regulatory relaxations for testing. The regulatory sandbox allows the regulator, innovators, financial service providers and the customers to gauge the benefits and risks of a new technology.

In July 2016, the Reserve Bank of India (RBI) set up an inter-regulatory working group consisting of members from the RBI, the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI), the Pension Fund Regulatory and Development Authority of India, the National Payments Corporation of India, and the Institute for Development and Research in Banking Technology to conduct a granular review of disruptive financial technologies in India. The main objective of the working group was to refine and deliver low-cost financial products and services for consumers by reviewing rapidly evolving dynamics in Fintech and recommending changes to improve the regulatory landscape.

On 18 April 2019, the RBI had issued the draft Enabling Framework for Regulatory Sandbox (RBI draft) inviting comments from all stakeholders up to 8 May 2019. An indicative list of products, services, technology that may be considered for sandbox testing include retail payments, money transfer services, digital know your customer (KYC) technologies, financial advisory

Archana Tewary
Archana Tewary
J. Sagar Associates

services, smart contracts, financial inclusion products, cyber security products, data analytics, application program interface services, applications under blockchain technologies, artificial intelligence and machine learning. It clarifies that only startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) will be eligible for entry into the regulatory sandbox.

SEBI had issued a circular dated 20 May 2019 introducing a sandbox as a catalyst for innovation in the securities market. The SEBI circular proposes to provide eligible Fintech companies with market related data (including trading and holding data), which is otherwise not readily available to them. The SEBI circular envisages furnishing historical and anonymized market-related data to such participants for offline testing, in complete isolation from the live market. This is analogous to how the RBI draft seeks to protect the core-banking solutions of a financial institution, while enabling provision of information and infrastructure to participants of the regulatory sandbox, for the limited purpose of testing.

Arjun David Alexander
Arjun David Alexander
J. Sagar Associates

While the RBI has sought comments from all stakeholders before rolling out guidelines for the regulatory sandbox, the SEBI circular is a call to arms for the stakeholders to form a steering committee to formulate operating guidelines for the innovation sandbox based on the outline sketched by the SEBI circular. The steering committee will comprise representatives from the Fintech sector, academia, angel investors and other areas as may be prescribed by SEBI.

The steering committee will be tasked with responsibility to prepare datasets of historical and anonymized information (including holding data, KYC data, order logs, trade logs, mutual fund transactions data, and so on.) for use by eligible Fintech companies. The SEBI circular provides that the entire sandbox participation lifecycle (application, tracking, onboarding, monitoring, reporting, and so on.) shall be completely digital, ensuring transparency and efficiency. Unlike the RBI draft, the eligibility criteria prescribed by the SEBI circular does not expressly stipulate onerous conditions like recognition in the eyes of the DPIIT, corporate structuring requirements and high net-worth requirements. It is possible that the operating guidelines to be formulated by the steering committee may be developed further and specify conditions in this respect along the lines of the RBI draft, for applicants interested in the innovation sandbox.

Indian Fintech companies have attracted nearly US$6 billion in investments since 2014 and projects worth US$1 trillion will be digitally disbursed in India by 2029. IRDAI has also proposed draft regulations for a regulatory sandbox in the insurance sector on 18 May 2019 (which were open for comments till 31 May 2019). The sandbox initiative should provide a bird’s eye view of risks and challenges to the regulators, to ensure that the Indian policy road map is clear of all roadblocks and free of risk. Some regulators have already adopted automation and big data analytics to improve efficiency and streamline workflow.

Archana Tewary is a partner and Arjun David Alexander is an associate with J. Sagar Associates. Their views are personal.

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