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Updated Financial Technology Regulatory Sandbox Framework Enhancements Introduced to Increase Accessibility

Bank Negara Malaysia (“BNM”) has on 29 February 2024 issued a new Policy Document (“PD”) on Financial Technology Regulatory Sandbox Framework (the “Framework”) to replace the earlier version that was issued back in 2016.

The new PD came into force on the date of its issuance, and it seeks to enhance the Framework so as to ensure proportionate regulatory facilitation and improving the operational efficiency of the existing sandbox procedures. This article attempts to provide a brief outline of the Framework and the enhancements introduced by the PD.

Financial Technology Regulatory Sandbox
As most would no doubt agree, the financial services industry is one of the most regulated industries anywhere in the world. This is hardly surprising given the importance of stability in the money market.

That being said, it is also equally important for the financial services industry to keep pace with the development of technology to ensure innovation and service improvement. Due to its disruptive nature, financial technology (“Fintech”) providers often find themselves facing difficulties in the deployment of their solutions, owing to potential archaic or non-accommodative regulatory framework. The Fintech regulatory sandbox (“Sandbox”) established under the Framework is an attempt by BNM to address this pain point.

The purpose of the Sandbox is essentially to allow Fintech solutions providers to have temporary rights to deploy and operate their solutions in a live environment, with more “relaxed” regulatory treatment. Participants in the Sandbox would have identified a series of regulatory requirements that they are unable to meet due to the nature of their solutions or business model, and exemptions would be granted to them for a limited duration from having to comply with these regulatory impediments. Upon the expiry of the “playtime”, BNM will then make an assessment as to whether a Sandbox participant should be allowed continued operation of its solution.

Enhancements to the Fintech Regulatory Sandbox Framework
The PD introduces two (2) enhancements to the Framework:

i. A fast-track application and Fintech solutions testing approval process called the “Green Lane”; and
ii. A simplified process to assess the eligibility of an applicant to participate in the “Standard Sandbox”.

We will provide a summary of each of the enhancements in turn below.

1. Green Lane
The Green Lane is a fast-track approval process set up especially for financial institutions (“FIs”) only. FIs with proven track records in strong risk management, compliance and governance, can utilise the Green Lane to shorten the time required to obtain approval to test their Fintech solutions in the Sandbox.

Interested and eligible FIs can make an application to participate in the Sandbox through the Green Lane by demonstrating their past records in risk management, compliance and governance. Once the BNM is satisfied of an FI’s track record in risk management, compliance and governance, a Green Lane approval will be issued. Thereafter, the FI will only have to register its Fintech solutions with BNM for testing in the Sandbox, at least 15 days prior to the intended testing commencement date. FI with Green Lane qualification can register multiple Fintech solutions for testing over the subsistence of its Green Lane qualification, and there is no need for the FI to make fresh Green Lane application each time.

Overall, the Green Lane is a new path to Fintech solution testing in the Sandbox that is much simpler than the Standard Sandbox process (which we will get to in the next section). The Green Lane affords FIs a faster process to test their Fintech solutions in the Sandbox, subject to the FIs first proving their eligibility to be in the Green Lane. Notwithstanding the easier access to the Sandbox however, the FIs in the Green Lane will still have to adhere to certain parameters and safeguards prescribed under the PD, primarily for customer protections, and BNM still reserves the right to revoke an FI’s Green Lane qualification or reject the registration of Fintech solutions to be tested, particularly where adverse developments have been observed during the testing of Fintech solutions.

Fintech companies or non-FIs can make use of the Green Lane by collaborating with FIs (e.g., outsourcing of Fintech solutions to FIs, equity participation, joint venture, etc.), subject however to the discretion of BNM.

2. Simplified Eligibility Assessment for the Standard Sandbox
The Standard Sandbox entails a 2-tiered assessment process. In the first stage, applicants are first assessed on whether they are eligible to take part in the Standard Sandbox. Once the first stage has been passed, the applicants are then assessed on their readiness or preparedness in satisfying BNM’s considerations to test the Fintech solutions.

Under the new PD, the stage 1 assessment is simplified to the extent that an applicant will only have to demonstrate (amongst others) its ability to identify and mitigate risks associated with the Fintech solution testing, and a semi-functional prototype of the Fintech solution within 3 months from the date of application for participation in the Standard Sandbox. This is a much-welcomed change from the regulator’s past approach of requiring applicant to have a ready product before making any application to participate in the Sandbox. Now, an applicant will only be required to come up with a fully functional prototype during the second stage of the assessment process, allowing greater flexibility to the applicant.

The effort of BNM in ensuring the regulatory framework keeps pace with technology evolution certainly deserves applause. The enhancements to the Framework brought by the new PD effectively make the Sandbox more accessible to innovators and Fintech solutions providers. This should drive innovations and hopefully boost investment into the Fintech sector in Malaysia, giving Malaysians better financial services experience enhanced by technology, as well as extending the reach of financial services to the financially underserved.

About the author

Lo Khai Yi
Co-Head of Technology Practice Group
Technology, Media & Telecommunications, Intellectual
Property, Corporate/M&A, Projects and Infrastructure,
Privacy and Cybersecurity
Halim Hong & Quek

Ong Johnson
Head of Technology Practice Group
Transactions and Dispute Resolution, Technology,
Media & Telecommunications, Intellectual Property,
Fintech, Privacy and Cybersecurity
Halim Hong & Quek

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