RBI FinTech Regulatory Sandbox: Principles & Objectives

The Principles of a Regulatory Sandbox

A regulatory sandbox (a closed testing environment) is a framework giving innovators a platform to test business ideas and products with regulatory supervision—not attracting fines. A regulatory sandbox is simply a controlled framework setup by financial regulators or supervisors to facilitate dynamic and evidenced regulatory environments which learn and develop with emerging technologies. A regulatory sandbox is a frequently used term in the global FinTech universe. In the financial industry, the regulatory sandbox terminology relates to a mechanism for developing regulation that matches the dynamic pace of innovation.

In the current technologically advanced innovative business environment, reimagining the regulatory fabric to welcome innovation and build uncertainty mitigating environment to embrace flexible frameworks from which valuable lessons can be learned as time passes is necessary. This is to say that the application of passé regulatory principles to afresh challenges posed by new technologies’ infusion in financial services without any organised recognition of the allied interdisciplinary issues is not suitable.

The regulatory sandbox ecosystem provides an environment to innovative technology companies for controlled scale testing of new products or services in an eased regulatory waive. Regulatory sandbox, being a formal regulatory program, offers market players a platform and an ecosystem to gauge the strengths and weaknesses of products, services, or business models with customers in a live environment—whilst also having warranted safeguards and supervision.

The Objectives of a Regulatory Sandbox

The core objectives of a regulatory sandbox depend upon the mandate of the regulator (or supervisor). These are also stated comprehensively in the founding document of the sandbox. The essential objectives of regulatory sandbox are to introduce competition and efficiencies with optimal application and exploitation of innovation. The role of regulatory sandboxes in promoting innovation may be limited in instances where a regulatory reform would be a more sensitive approach to deal with new entrants and technologies.

Given the currently underway rapid technological developments in the financial services sphere, so as to increase consumer benefits (via competition) and ensure enough consumer protection, prudency in the regulatory framework summons considerable utility investment in innovation—and hence, ‘FinTech regulatory sandbox’ is the need of the hour. Considering the global momentum following the concept of sandboxes and the favouring outcomes of experiments in other parts of the world, this is the apt period to consider implementing this regulatory technique by financial regulators or supervisors. The intention of the sandbox is to acclimatise compliance with stringent financial regulations to the growth and dynamic speed of the highly innovative FinTech companies, such that doing so doesn’t hinder the FinTech sector development with rules—whilst also safeguarding consumer protection.