In the past years, we have observed the rapid or rather aggressive growth and development of the financial technology (“Fintech”) industry in Malaysia. Banks and digital services providers have transitioned from the traditional mode of business to adoption of digital banking or advanced payment solutions to fetch the needs and demands of consumers by for instance a simple click or face recognition.
In the growth of such fast-evolving transition, the existing legal structure or framework in Malaysia may not be kept pace with the speed of Fintech companies introducing new innovative products, services and solutions in Malaysia. This has led to the launch of the Regulatory Sandbox by Bank Negara Malaysia (“BNM”) (“Regulatory Sandbox” or “Sandbox”) in October 2016 to provide a regulatory environment that is conducive for the deployment of Fintech and encourage overall technological innovation in the Malaysian financial sector.
- 1. Do you have a Sandbox in place in your jurisdiction? If not, is there any draft law addressing this initiative in the short / mid-term?
In Malaysia, Regulatory Sandbox was established by BNM to provide a live, contained environment in which participants may test their Fintech related product, service or solution within the legal parameters under the governing framework known as the Financial Technology Regulatory Sandbox Framework.
- 2. What are the main benefits of the Sandbox?
The Regulatory Sandbox acts as a catalyst in the introduction of new technological innovation and the delivery of financial services in Malaysia by granting regulatory flexibilities for Fintech solutions to be experimented in a production or live environment. Such flexibilities will be accompanied by appropriate safeguards to preserve financial stability, integrity of financial transactions, ensure fair business conduct and fair treatment to consumers.
It provides an avenue to the Fintech companies to enjoy regulatory flexibilities and facilitate the growth of innovative financial services with genuine value proposition that may otherwise be impeded from doing so due to any regulations. However, it is pertinent to note that the Sandbox cannot be used to circumvent existing laws and regulations. It is therefore not suitable for proposed product, service or solution that is already appropriately addressed under prevailing laws and regulations.
In other words, the Sandbox is a shield to protect Fintech ideas or solutions which may otherwise be rejected outright before the existing laws of Malaysia. Where there is limitation in the current laws, the Sandbox can be used as a practical framework to allow Fintech companies to venture and explore possibilities within the legally safe boundary.
- 3. Who can apply for the Sandbox?
The Regulatory Sandbox is open to the financial institutions (either on its own or in collaboration with a Fintech company) and all Fintech companies i.e. a company that utilises or plans to utilise technological innovation in the provision of financial services, including those without any existing presence in Malaysia but are interested to offer their services in the Malaysian market.
It is not necessary for a Fintech company to partner with a financial institution to be eligible for the Sandbox. However, Fintech companies that collaborate with financial institutions could gain added advantages from guidance and support provided by a partner financial institution.
- 4. How do you apply for the Sandbox?
An applicant must submit to BNM the prescribed Sandbox Application Form signed by the Chief Executive Officer of the applicant and all the relevant supporting documents. BNM will inform an applicant of its eligibility to participate in the Sandbox within 15 working days of receiving a complete application.
In the event of a rejected application, a cooling off period of six (6) months will need to be observed before the applicant is allowed to resubmit the application.
- 5. What are the main requirements to apply for the Sandbox?
An applicant seeking BNM’s approval to participate in the Regulatory Sandbox must fulfil the following criteria and demonstrate that:
(a) the product, service or solution is genuinely innovative with clear potential to:
- i) improve accessibility, efficiency, security and quality in the provision of financial services;
- ii) enhance the efficiency and effectiveness of Malaysian financial institutions’ management of risks; or
- iii) address gaps in or open up new opportunities for financing or investments in the Malaysian economy;
(b) the applicant has conducted an adequate and appropriate assessment to demonstrate the usefulness and functionality of the product, service or solution, potential to improve financial services and satisfy market demand gaps and identified the associated risks. Typically, it would entail a strong market gap assessment or research accompanied with a solid underlying understanding of the relevant market landscape and accurate identification of issues currently in the market;
(c) the applicant has the necessary resources to support testing in the Sandbox. This would include a ready prototype or minimum viable product to demonstrate the proposed solution, reasonably adequate financial and human resources to support live testing, and expertise to mitigate and control potential risks and losses arising from offering of the product, service or solution;
(d) the applicant has a realistic business plan to deploy the product, service or solution on a commercial scale in Malaysia after exit from the Sandbox;
(e) the provision of the product, service or solution is either wholly or partly incompatible with laws, regulations or standards administered by BNM. In such cases, BNM may consider granting relevant regulatory flexibilities for the purpose of testing a proposed product, service or solution that possesses strong value propositions; and
(f) the applicant is led and managed by persons with credibility and integrity.
Further, in considering an application to participate in the Sandbox and the types and extent of regulatory flexibilities that may be accorded to the participants operating in the Sandbox, BNM will take into account, among others, the following:
(a) the potential benefits of the proposed product, service or solution;
(b) the potential risks and mitigating measures; and
(c) the integrity, capability and track record of the financial institutions or fintech companies.
Companies with potential to contribute meaningfully to the creation of high value added jobs in Malaysia will be assessed more favourably by BNM.
- 6. How many phases are there in the Sandbox and what is the duration of the Sandbox?
Eligible applicants who are admitted into the Sandbox will move into preparation phase to work with BNM to prepare for live-testing. This will involve detailed discussions on several matters such as determining the appropriate testing parameters, ensuring adequate safeguards and robust risk management are put in place, and setting key performance indicators (KPI) to measure success and failure of the test, including planning for potential next steps after the test.
Applicants who have successfully completed preparations will be given approval to test the solution in the live market. The initial testing period is subject to a maximum of 12 months from the start date of the test. Upon expiry of the testing period, an approval to participate in the Sandbox and any regulatory flexibility accorded to the participants will automatically expire, unless the participant has obtained prior written approval from BNM for an extension of the testing period.
- 7. What happens to the projects that have successfully passed the Sandbox?
Upon completion of the testing, BNM will decide whether to allow the tested product, service or solution to be introduced in the market on a larger scale by taking into account the underlying economic and innovative values. Note that BNM may prohibit deployment of the product, service or solution in the market, amongst others, if the product, service or solution may cause unintended negative consequences to the public and/or financial stability.
Where successfully passed, participating Fintech companies intending to carry out regulated businesses will be assessed based on applicable licensing, approval and registration criteria under the Financial Services Act 2013, Islamic Financial Services Act 2013 and/or Money Services Business Act 2011 (collectively “Applicable Laws”), as the case may be. Note that approval to test in the Sandbox is not a guarantee for BNM’s issuance of the full licence or approval. In other words, there is no blanket approval under the Regulatory Sandbox and it will be subject to the fulfilment of the requisite requirements under the Applicable Laws by the applicants.
- 8. Other relevant information.
It is one of the necessary conditions that regulatory impediments are identified clearly to be eligible for the Regulatory Sandbox. Also, the Sandbox cannot provide regulatory flexibilities on requirements that originate from regulations beyond BNM’s regulatory ambit. Applicants are responsible to comprehensively assess the potential legal implications of the services they intend to offer vis-à-vis regulations administered by BNM or other regulators such as the Securities Commission of Malaysia.
This article is intended to be informative and not intended to be nor should be relied upon as a substitute for legal or any other professional advice.
About the Author
Tan Lee Weei
Halim Hong & Quek
Choo Sheau Kee
Halim Hong & Quek