Financial Technology Regulatory Sandbox Framework

The Financial Technology Regulatory Sandbox Framework (“Framework”) was first introduced in October 2016 to provide a regulatory environment that is conducive for the deployment of financial technology (“fintech”) and to facilitate meaningful innovation in the Malaysian financial sector. Through the regulatory sandbox (“sandbox”), regulatory flexibilities may be granted to applicants to allow experimentation of fintech solutions in a live environment, subject to appropriate safeguards and regulatory requirements.

The sandbox has played an important role in advancing digital innovation for both incumbents and start-ups, with over 110 applications received over six years since it began operation. The sandbox has enabled the testing of various new technologies (e.g. electronic Know-Your-Customer) and business models (e.g. digital insurance, peer-to-peer family takaful, buy-now-pay-later, digital remittance) in the market which has helped inform the Bank’s developmental policy considerations and contributed to several policy enhancements. The sandbox also strengthened collaborative efforts between stakeholders in the fintech ecosystem by acting as a platform for active and open engagements with the Bank.

More importantly, past sandbox experiences have provided key learnings in anticipating future development and ensuring objectives of proportionate requirements and responsible innovation are met. In particular, two key insights have been helpful in formulating policies and appropriate regulatory requirements:
(a) a one-size-fit-all type of framework for sandbox may be less suited to foster financial innovation in the current market given growing innovation capabilities and appetite within the financial sector to conduct the test-and-learn approach; and
(b) based on engagements with sandbox applicants thus far, it is noted that the past sandbox eligibility assessment may be challenging for early stage fintech startups to navigate. This could potentially lead to challenges for applicants to secure the necessary resources to support further development of their solutions.

Reflecting on the feedback received, the Bank is introducing two key enhancements to the Framework issued in October 2016, as follows:
(a) simplification of the Stage 1 eligibility assessment criteria of the Standard Sandbox pathway (Stage 1 – Eligibility Stage). This is to ensure that the rigour of assessment is proportional and better aligned with the development cycle of new innovations; and
(b) introduction of a risk-proportionate accelerated track under the Framework, referred to as the Green Lane, to facilitate faster testing of innovative solutions by granting regulatory flexibility to financial institutions, with strong track record in risk management, governance, and compliance capabilities.
A comparison of the application and assessment process for both tracks is illustrated in Appendix I.

It should be emphasised that while the enhancements are intended to accelerate testing via the sandbox, it cannot be used to circumvent existing laws and regulations merely for the purpose of facilitating market entry of new entrants. Regulated activities involving solutions that are not suitable to be tested under the sandbox will be guided towards the appropriate regulatory pathways and assessed accordingly.

This document belongs to Bank Negara Malaysia (BNM). Full access to the original source is available here: https://www.bnm.gov.my/banking-islamic-banking