RBI FinTech Regulatory Sandbox: Meaning & Rationale

Introduction to a FinTech Regulatory Sandbox

Live or virtual testing of innovative products and services, in a controlled testing setup, in presence or absence of any ‘regulatory relief’ is termed as a ‘sandbox’. A FinTech regulatory sandbox, in simple parlance, is meant to assist financial technology compaanies test their products while still adhering to the compliance framework. The testing environment may well be offered to regulated or unregulated entities. The regulator facilitates access to the suitable regulatory support by easing particular legal and regulatory compliances—in usual times adhering to these frameworks is mandatory for the sandbox entity—for as long as the sandbox is in force.

What the RBI Means by Regulatory Sandbox?

In December 2018, the Securities and Exchange Board of India (SEBI)—the capital market regulator—expressed its consideration of planning a ‘sandbox policy’ to promisingly help shape technology developments in financial markets. The idea was to facilitate the technology companies to allocate their crucial efforts on innovations with regulatory easing. A committee was also being formed to explore the regulatory sandbox concept in India.

The Reserve Bank of India (RBI) followed the trend with the release on 18 April 2019 of its draft ‘Enabling Framework for Regulatory Sandbox,’ to create an enabling environment for the burgeoning FinTech industry of India. The said regulatory sandbox (RS)—a product of the report submitted on 8 February 2018 by the Inter-Regulatory Working Group on FinTech and Digital Banking in India—would be within a clearly defined space and duration with the requisite regulatory guidance of the RBI, so as to increase efficiency, manage risks, and generate fresh opportunities for consumers.

The draft document goes on to describe the regulatory sandbox as a framework developed by a financial sector regulator for allowing small scale and live testing of innovations introduced by private firms in a controlled environment (operational with special exemptions and allowances) under the supervision of the regulator. The regulatory sandbox concept came into vogue during the phase of speedy technological innovation in financial markets, for addressing the frictions between regulators’ desire to encourage and enable innovation and the emphasis on regulation.

Within the confined limits of the controlled (test) regulatory environment, the regulators may (or may not) offer specific regulatory waives for the limited duration of the applied testing phase. With the RS, all the stakeholders, viz. the regulator, the innovators, the financial service providers (as potential deployers of the technology) and the customers (as final users), get to conduct field tests to record concrete evidence on the potential profits and pitfalls of the proposed (new) financial innovations.

The Rationale for RBI’s Regulatory Sandbox

A regulatory sandbox essentially provides the capability to redefine the nature of the relationship shared by the financial regulators and the regulated—financial services providers—thereby taking all the stakeholders to the platform where an open and active dialogue can take place. A regulatory sandbox could also facilitate for the regulator a revision and reshaping of the regulatory and supervisory framework–injecting agility. An RS essentially is meant to stimulate competition and efficiencies in financial services markets via innovation.

The market ecosystem—service providers, competition, quality of innovations, level of development of the financial market infrastructure, and customer trust and engagement—determine the success probability of a regulatory sandbox. RS offers a structured platform to the regulator for connecting with and assessing the ecosystem, whilst also developing innovations that are enabling or responsive, and regulations that enable delivery of relevant and affordable financial products. Sandbox is intended to motivate increased numbers of FinTech experimentation in a clearly defined realm and timeframe where regulators cooperate in giving the requisite regulatory assistance—meant to augment efficiency, optimally mitigate risks and generate fresh avenues for consumers.