Financial technology (“FinTech”) refers to the usage of new technologies, which include new applications, processes, products or business models, in the provision of financial services. According to an Accenture report, FinTech investment in Asia-Pacific more than quadrupled in 2015 to US$4.3 billion and now accounts for 19 percent of global financing activity, making the region the second largest for FinTech investments after North America.
In Singapore, the Monetary Authority of Singapore (“MAS”) has shown its commitment to FinTech through a series of initiatives to engage and nurture the booming sector. They include, but are not limited to, committing S$225 million to create a Financial Sector Technology and Innovation scheme to set up innovation labs and build industry-wide technology infrastructure for the delivery of new and integrated services and creation of a regulatory sandbox (“Sandbox”) as further discussed in this article.
The Regulatory Sandbox
In Singapore, the financial services industry is heavily regulated, and no FinTech-specific regulations have been implemented. Consequently, as financial products or services that utilise FinTech become more sophisticated, there is growing uncertainty on the part of financial institutions (“FIs”) and start-ups over whether their innovation meets legal and regulatory requirements.
To prevent stifling potentially promising innovations and to encourage and enable experimentation of solutions that utilise new technology to deliver financial products or services, MAS issued a consultation paper on 6 June 2016 proposing guidelines for setting up the Sandbox. The Sandbox reflects MAS’ recognition that innovation in finance is key to enabling solutions that utilize technology to deliver financial services and products more efficiently, improving our everyday lives.
The Sandbox will allow FIs or start-ups to launch their innovation within controlled boundaries and test the viability of their financial services in a cost effective and timely manner. Depending on the experiment, MAS will provide appropriate regulatory support by relaxing specific legal and regulatory requirements, which the innovation would have otherwise been subject to, for the duration of the Sandbox.
Following public consultation and taking into account feedback received from various stakeholders, MAS published its FinTech Regulatory Sandbox Guidelines (“Guidelines”) on 16 November 2016. The Guidelines aim to improve the clarity, flexibility and transparency of the regulatory Sandbox by setting out the objective and principles of the Sandbox, providing interested applicants with guidance on the application process and the evaluation criteria for entry into the Sandbox.
A brief summary of how the Sandbox operates is described in further detail below.
Entering The Sandbox
To enter the Sandbox, FIs and start-ups must first obtain approval from the MAS. To be eligible, an applicant must demonstrate, among other requirements, that the financial service or product includes new or emerging technology or uses existing technology in an innovative way, addresses a problem or brings benefits to consumers or the industry. Furthermore, the applicant has to have the intention and ability to deploy the technology in Singapore on a broader scale after exiting the Sandbox.
Prior to making an application, the FI or start-up is expected to have carried out its due diligence, such as testing the proposed financial service or product in a laboratory environment and knowing the legal and regulatory requirements for deploying the proposed financial service in Singapore.
Upon receipt of a complete and final set of information for assessment, MAS will review the application and aim to inform the applicant within 21 working days whether the matter is suitable for a Sandbox. MAS may also make further assessments before approving the Sandbox application.
In The Sandbox
MAS will decide, on a case-by-case basis, which legal and regulatory requirements to relax and which to uphold for the duration of the Sandbox. The entity should report to MAS on the test progress based on an agreed schedule.
Legal and regulatory requirements that the MAS are generally prepared to consider relaxing include requirements relating to asset maintenance, board composition, financial soundness, minimum paid-up capital, track record, management experience and those prescribed in certain various guidelines published by the MAS, such as technology risk management guidelines and outsourcing guidelines.
However, requirements relating to matters, such as confidentiality of customer information, fit and proper criteria particularly on honesty and integrity, prevention of money laundering and countering financing of terrorism and handling of customer money and assets by intermediaries, must be maintained.
Upon approval by the MAS, the Sandbox entity will be launched into the experimentation stage. The Sandbox entity must notify its customers that the financial service provided is operating in a Sandbox and there has to be clear disclosure on all associated key risks. Customers are required to acknowledge that they have read and understood these risks.
Exiting The Sandbox
At the end of the Sandbox period, the Sandbox entity must exit from the Sandbox. Upon exit, the Sandbox entity can proceed to deploy the financial service on a broader scale provided that MAS and the Sandbox entity are satisfied that the Sandbox entity has achieved its intended test outcomes and the Sandbox entity can fully comply with the relevant legal and regulatory requirements.
The introduction of the Sandbox is a welcome development considering the complexity of the issues that arise from innovative products created by FinTechs and the difficulty in applying longstanding regulations and concepts to those products.
This represents a shift from the traditional approach of regulation where permission to operate is granted only if an entity meets, in full, all of the baseline criteria specified by the MAS. Companies in the Sandbox get to test an idea first and discuss with the MAS about how its rules and regulations apply to the service or product.
Moving forward, this collaborative framework will also allow MAS to scrutinise and tailor the regulatory approach for FinTech players, which will ultimately aid the formulation of FinTech-specific regulations and policies in the future.
The relaxation of regulatory requirements also indicates an understanding that cost is often a major entry barrier for FinTech startups, the majority of which are unlikely to have the financial standing or resources to meet MAS’ legal requirements, which could prevent them from entering the market even if they offer innovative services or solutions. The Sandbox therefore provides a good platform for these companies to build on their ideas, even if they might not meet certain existing legal conditions.
However, there are some challenges. First, given that there is much subjectivity in ascertaining how innovative a FinTech service or product is, MAS may not be in the best position to determine this. Second, the application process could potentially be cumbersome as it appears to involve the submission of a substantial amount of time-consuming paperwork. Taking into account how rapidly the FinTech industry evolves, an extended period of uncertainty may render the Sandbox ineffective.
Notwithstanding the potential challenges, the regulatory approach and attitude adopted by the MAS are representative of Singapore’s willingness to embrace the adoption of technology in the financial sector and the development of Singapore as a key global FinTech hub. The UK appears to have taken the clear lead with its proactive approach and now the MAS has the tools to catch up. This is excellent news for FinTech innovators and, hopefully, Singapore.
The content of this update is of general interest and is not intended to apply to specific circumstances. The content should not therefore, be regarded as constituting legal advice and should not be relied on as such.