NASSCOM Policy Brief
The Reserve Bank of India’s draft enabling framework for regulatory sandbox
In a move to promote technological innovations aimed at financial inclusion, the Reserve Bank of India (RBI) has proposed to set up regulatory sandboxes where startups can test new products, services or business models with customers in a live environment, subject to certain safeguards and oversight. According to the draft consultation paper released by the central bank last week, the focus of these sandboxes will be to encourage innovations where there is absence of governing regulations; there is a need to temporarily ease regulations for enabling the proposed innovation; and the proposed innovation shows promise of easing/effecting delivery of financial services in a significant way.
RBI had set up an inter-regulatory working group in July 2016 to look into and report on the granular aspects of fintech and its implications so as to review the regulatory framework and respond to the dynamics of the rapidly evolving fintech scenario. The expert panel headed by Sudarshan Sen, Executive Director, RBI released its report on 8 February 2018 for public comments. One of the key recommendations of the working group was to introduce an appropriate framework for a regulatory sandbox.
While these sandboxes have been mandated to focus on thematic cohorts such as financial inclusion, payments and lending, digital KYC (know your customer); any product/services which have been banned by the regulators or the government, including crypto currency/crypto assets services have strictly been discouraged.
Benefits of regulatory sandboxes have been summarized as follows:
- It fosters ‘learning by doing’ for both regulators and service providers as it enables them to obtain first-hand empirical evidence on the benefits and risks of emerging technologies.
- Allows to test the product’s viability without the need for a larger and more expensive roll-out.
- Accelerate financial inclusion in areas such as microfinance, innovative small savings and micro-insurance products, remittances, mobile banking and other digital payments.
- Leads to better outcomes for consumers through an increased range of products and services, reduced costs and improved access to financial services.
The sandbox applicants have been mandated to follow the regulatory requirements including customer privacy and data protection, secure storage of and access to payment data of stakeholders, security of transactions and KYC/AML/CFT requirements.
The eligibility criteria for entry to the regulatory sandbox have also been outlined in the document. The paper clearly states that the focus of these sandboxes will be to encourage innovations where there is absence of governing regulations; there is a need to temporarily ease regulations for enabling the proposed innovation; and the proposed innovation shows promise of easing/effecting delivery of financial services in a significant way.
Possible limitations and risks
- According to the draft consultation paper, there will be limited intake of applicants. The testing, will be for a limited set of customers, and only 10-12 companies. These companies will only be permitted to use the sandboxes once they meet the eligibility criteria set by the RBI.
- Innovators may lose some flexibility and time in going through the sandbox process (but running the sandbox program in a time-bound manner at each of its stages can mitigate this risk).
- The RBI or its regulatory sandbox cannot provide any legal waivers to the applicants.
- Post-sandbox testing, a successful experimenter may still require regulatory approvals before the product/services/technology can be permitted for wider application.
- Regulators can potentially face some legal issues, such as those relating to consumer losses in case of failed experimentation or from competitors who are outside the regulatory sandbox, especially those whose applications have been/may be rejected. These, however, may not have much legal ground if the sandbox framework and processes are transparent and have clear entry and exit criteria.
We are studying the matter in detail and have also invited comments from stakeholders and members on this by 30th April 2019. For further discussion kindly contact Ms. Komal Gupta, Analyst- Public Policy and Government Outreach at email@example.com