Bank Negara Malaysia (‘BNM‘) issued a Exposure draft of the Financial Technology Regulatory Sandbox Framework policy document (‘Exposure Draft‘) March 28, 2023.
When the policy document resulting from the exposure draft is issued, it will replace BNM’s policy document on financial technology Regulatory Sandbox Framework issued on 18 October 2016 (‘Existing policy document‘).
As in the case of the existing policy document, the replacement document will apply to:
one. a financial institution, namely:
- an authorized or registered person under the Financial Services Act 2013 (‘FSA‘);
- an authorized person under the Islamic Financial Services Act 2013 (‘IFSA‘);
- a licensee under the Money Services Business Act 2011 (‘MSBA‘); and
- a prescribed financial institution under the Development Financial Institutions Act 2002;
b. a fintech company (‘fintech company‘) who collaborates with a financial institution;
c. a fintech company that intends to continue:
- an authorized or registered business as defined in the FSA;
- an authorized business as defined in IFSA; or
- a money services business as defined in the MSBA.
A fintech company is a company that uses or plans to use technology or other innovation in the provision of financial services (‘fintech‘).
The exposure draft proposes to introduce two important improvements to the existing policy document:
one. the simplification of the existing stage 1 eligibility criteria for standard sandbox road; and
b. the introduction of the Innovation Green Lane (‘Green Lane‘), a risk-proportional accelerated track to facilitate faster testing of innovative solutions in the fintech sandbox by financial institutions with strong results in risk management, governance and compliance.
Standard sandbox
The exposure draft proposes that the application to participate in the standard sandbox be divided into two stages, namely:
- Standard Sandbox Stage 1 – Qualification; and
- Standard Sandbox Step 2 – Preparation.
?Stage 1 – Qualification
To be eligible to participate in the sandbox through the sandbox standard procedure, the applicant must satisfy five criteria:
Criteria 1: Identification of the regulatory obstacle
The proposed solution is wholly or partially incompatible with existing laws, regulations and standards administered by BNM;
Criteria 2: Value proposition
The proposed solution is innovative with clear potential to improve the availability, efficiency or quality of financial services, or improve the effectiveness of risk management in financial services;
Criteria 3: Business plan and preparedness
The applicant has reasonable resources to run a prototype within three months from the time of application (or such longer period as may be permitted);
Criteria 4: Risk management
The applicant has sufficient resources and ability to identify and mitigate risks associated with the proposed solution in a manner proportionate to the estimated scope of business activity and its nature of risk; and
Criteria 5: Fit-and-right
The applicant has a proven track record of demonstrating the credibility and integrity of key management personnel and persons with significant decision-making authority in the proposed solution. BNM will endeavor to inform the applicant of their eligibility to participate in the sandbox within 15 working days of receiving a complete set of information necessary for the assessment. Eligibility to participate in the sandbox does not constitute approval for testing the proposed solution in the sandbox. Step 1 serves to inform the applicant of its potential suitability to participate in the sandbox and to assist the applicant with its business and resource planning.
Step 2 – Preparation
Once the applicant is deemed eligible to participate in the sandbox, it will proceed to step 2 of the standard sandbox procedure, i.e. the preparation stage. In step 2, BNM will assess whether the applicant should be approved to test a solution in the sandbox based on the applicant’s ability to satisfy the following:
one. the applicant must demonstrate the practical feasibility of its solution via a prototype and the clarity of its front-end and back-end infrastructure supplemented by appropriate product documentation (e.g. functional, technical design document, user guide, etc.);
b. the applicant must demonstrate that it has sufficient resources to support the testing of the solution in the sandbox prior to live testing with appropriate evidence (e.g. funding letter); and
c. the applicant must be able to identify the potential risks to financial institutions and financial consumers that may arise when testing the solution in the sandbox and propose appropriate safeguards to address the identified risks.
At the same time as the above, BNM will engage the applicant in the following:
one. the test parameters, such as the scope and duration of the test, requested regulatory flexibilities and reporting frequency;
b. the specific measures to determine the success or failure of the test at the end of the test period;
c. an exit strategy if the test fails or is aborted; and
d. a transition plan for distribution of the solution on a commercial scale upon successful testing and exit from the sandbox.
Innovation Green Lane
According to BNM, Green Lane has been introduced to accommodate industry developments since the sandbox was first established in 2016. In this regard, BNM noted that financial institutions have gradually increased their appetite and resources for iterative deployment of small-scale projects to test new ideas and solutions.
Green Lane is an alternative to the standard sandbox procedure. It seeks to offer an easier and faster way for financial institutions to continuously test innovative solutions that face regulatory hurdles.
A financial institution’s eligibility to participate in the sandbox through Green Lane involves two levels of assessment:
one. a one-off assessment of a financial institution’s risk management, compliance and governance capabilities to determine approval to use Green Lane; and
b. subsequent simplified registration procedures for approved Green Lane participants to test individual solutions that face regulatory obstacles.
Application procedure and assessment process
Only financial institutions (and not fintech companies) are eligible to apply for Green Lane. Applications from financial institutions to use Green Lane may include cooperation with fintech companies. However, BNM reserves the right to decide whether such collaborations should be tested in the sandbox through Green Lane or the standard sandbox procedure.
Financial institutions intending to use Green Lane are expected to have a strong track record in risk management, compliance and governance. In assessing whether a financial institution should be approved to participate in the sandbox through Green Lane, BNM will assess a financial institution’s risk management, compliance and management capabilities based on its existing track record.
BNM will endeavor to inform the financial institution of its decision to approve the latter’s participation in the sandbox through Green Lane within 30 working days of receiving a complete application.
After the application to participate in the sandbox through Green Lane is approved, the financial institution will be considered a participating institution. An approval to use Grønn Lane is automatically renewed on an annual basis, unless it is withdrawn by BNM.
Eligible projects – parameters and safeguards
A participating institution that has been approved to use Green Lane can use a simplified registration procedure to start testing new solutions in Green Lane subject to the following:
one. A participating institution that intends to test solutions offered to the general public must take practical measures to limit the offer to 10,000 unique individuals or business entities during the test period which shall not exceed 12 months;
b. A Participating Institution must assess the potential direct financial losses associated with its solution that all customers and entities may suffer and provide appropriate compensation should such a risk occur;
c. A participating institution must inform BNM of its intention to test a new solution at least 15 working days before the planned date of testing, such notification is referred to as a “registration” of a Green Lane project.
A participating institution may proceed with the testing of the registered Green Lane project on the proposed test date if BNM has not expressed concern or prohibited the project. The regulatory flexibilities listed by the participating institution in the registration are considered to have been granted by BNM, subject to expiry or revocation of the approval to participate in the sandbox or written instructions from BNM to suspend the testing of the relevant registered Green Lane project.
Other demands
The provisions in the Exposure Draft related to the application requirements, expiry and revocation of approval, and submission of periodic and final reports to BNM are substantially similar to the corresponding provisions in the Existing Policy Document.
Feedback on exposure draft
Feedback on the exposure draft can be sent to BNM in paper form or preferably by electronic submission per 30 May 2023.
Comments
The exposure draft is the first revision of the existing policy document since it came into force on 18 October 2016. The introduction of a two-step application procedure for a standard sandbox application and in particular an accelerated procedure for testing a proposed solution in accordance with Green Lane will be welcomed by stakeholders, especially financial institutions. Fintech companies may be disappointed by their exclusion from having direct access to Green Lane. Perhaps the next big step for the Malaysian sandbox framework will be to provide access to the Green Lane to qualified fintech companies.
