On 18 October 2016, the Central Bank of Malaysia (“BNM”) issued the Financial Technology Regulatory Sandbox Framework ("Framework"), which sets out the requirements for participating in the regulatory sandbox (“Sandbox”). The Sandbox allows regulatory flexibilities to be granted to financial institutions and FinTech companies (“Applicants”) to experiment with FinTech solutions in a live controlled environment which is accompanied by the appropriate safeguards, for a limited period.
The concept of a regulatory sandbox framework is not new as other countries such as the United Kingdom, Singapore and Australia have proposed a similar concept. Save for the United Kingdom's Financial Conduct Authority (“FCA”), which launched its regulatory sandbox on 9 May 2016, the finalized policy documents for the implementation of the sandbox regulatory framework in the other countries have not been issued.
Brief outline of the Sandbox
In considering the FinTech solutions of Applicants, BNM has indicated in its Framework that it will either adopt an 'informal steer' approach by providing guidance and advice on the modifications that can be made to the FinTech solutions to comply with prevailing laws or permit Sandbox participation.
While BNM has not provided any indication on the regulatory flexibilities which can be accorded to participants of the Sandbox in the Framework (if the proposed FinTech solution possesses strong value propositions), directional guidance as to the outcomes which BNM intends to achieve have been identified.
In contrast, the Monetary Authority of Singapore ("MAS") has expressly provided that requirements relating to board composition, financial soundness, asset maintenance and credit ratings are matters that the MAS may consider dispensations. On the other hand, requirements relating to confidentiality, fit and proper criteria, handling of customer’s moneys and assets and anti-money laundering / counter financing of terrorism are not negotiable - these are largely in line with the outcomes intended to be achieved by BNM, with a view of avoiding systemic risks within the financial sector.
To be eligible, an applicant must demonstrate, among other things, that the FinTech solution is genuinely innovative and has a clear potential to improve the financial services sector in Malaysia. The test on innovation appears to be aligned with the threshold in Singapore as an applicant is required to demonstrate that the FinTech solution is genuinely innovative.
Testing of the FinTech Solution
Participants can operate in the Sandbox for the testing period approved by BNM, which shall not exceed 12 months, unless extended by BNM.
In contrast, the testing period is 6 months in Australia and 3 - 6 months in the United Kingdom. The longer period provided by BNM should be commended as this allows the FinTech innovations to undergo a more substantial phase of product development and commercialisation. This will in turn, assist BNM in more accurately identifying the regulatory issues and taking the necessary steps to resolve such issues.
Upon completion of the testing period, BNM will consider whether to allow the participant to graduate from the sandbox and introduce its FinTech solution in the market on a larger scale.
The introduction of the Sandbox should be applauded as it demonstrates BNM’s acknowledgment of FinTech as a catalyst for the development of progressive financial services. It also signifies active involvement on the part of BNM in engaging with the relevant stakeholders. Such initiatives will ensure that the Malaysian financial services sector keeps up with the paradigm shift in the use of technology in financial services, and therefore continues to remain relevant regionally and globally.