RBI Regulatory Sandbox
In order to review the regulatory framework and adapt to the dynamics of the rapidly changing FinTech scenario, the Reserve Bank of India (RBI) established an inter-regulatory Working Group (WG) in July 2016. The WG’s mandate was to investigate and report on the specific aspects of FinTech and its implications. On February 8th, 2018, the WG’s report was made available for public discussion. One of the main suggestions made by the WG was to establish a suitable framework for a Regulatory Sandbox (RS) within a timeframe and space that were clearly defined, where the financial sector regulator would provide the necessary regulatory guidance in order to boost productivity, control risks, and open up new opportunities for consumers.
Overview of RBI Regulatory Sandbox
To Support your firm, apply to the RBI's Regulatory Sandbox, Estabizz Fintech is here to help. The following services will be offered as part of the application process:
Included with the package
- We evaluate your startup's eligibility for the RBI's Regulatory Sandbox and determine if your business model is included in the list of approved practices.
- Starting with the business strategy and continuing until the application's final stage, we compile all the paperwork required for filing.
- In order to qualify for RBI's Regulatory Sandbox, we help your business comply with the essential regulatory criteria.
- For your startup, we provide consultation on every facet of the application procedure.
RBI Regulatory Sandbox: What is it?
The term "RBI Regulatory Sandbox" refers to the controlled and regulated environment where live testing of new financial goods and services is conducted. The regulators may or may not allow certain regulatory relaxations for the sole purpose of testing. The regulatory sandbox provides an opportunity for regulators, financial service providers, and consumers to test financial products or services in real-world settings and gather data on their advantages and dangers while keeping an eye on and managing those risks. With the help of such a framework, the regulators may interact with the ecosystem and create policies that support innovation or are responsive to it, making it easier to supply low-cost financial products. The regulator may learn from and advance with new technologies thanks to this dynamic and regulatory-based environment.
Benefits of RBI (Regulatory Sandbox)
A number of advantages may result from setting up a RS, some of which are noteworthy and are listed below:
- The RS promotes "learning by doing" on both sides in the first place. Regulators can make informed decisions about the regulatory modifications or new regulations that may be required to support useful innovation while containing the associated risks when they have first-hand empirical evidence of the advantages and risks of emerging technologies and their implications. Banks and other existing financial service providers have a better grasp of how new financial technologies could operate, which makes it easier for them to incorporate such new technology into their business strategies.
FinTech businesses and innovators may better comprehend the rules that govern their offers and modify their products appropriately. Final point: End-user input from consumers informs both the regulator and the innovator about potential costs and advantages for customers from these improvements.
- If an RS looks to have the potential to succeed, consumers may evaluate the product's feasibility without the need for a bigger and more costly roll-out. Before the product is released to the general public, necessary changes may be made if any issues are discovered during the sandbox phase.
- Third, FinTechs provide solutions that may significantly advance financial inclusion. The RS can make significant improvements in financial inclusion and financial reach in addition to speeding up innovation and technology adoption. Microfinance, creative small savings, remittances, mobile banking, and other digital payments are among areas that might benefit from the RS.
- Fourth, the regulator's reliance on industry/stakeholder consultations alone is proportionally reduced by offering a structured and institutionalized framework for evidence-based regulatory decision-making.
- Fifth, the RS may result in better results for customers via a wider selection of goods and services, lower prices, and easier access to financial services.
Limitations and Risks
1. The sandbox technique may cost innovators some freedom and time. However, this risk may be reduced by executing the RS in a time-bound way at each level.
Framework for Regulatory Sandbox Enabling
2. Customized authorizations on a case-by-case basis and regulatory easings may take time and judgement calls. This risk may be reduced by treating applications openly and making decisions in accordance with predetermined guidelines.
3. No legal waivers may be granted by the RBI or its RS.
4. After completing sandbox testing, a successful experimenter could still need regulatory clearances before the product, service, or technology is allowed to be used more widely.
5. There is a chance that certain legal difficulties, such as those pertaining to consumer damages in the event of unsuccessful testing, would arise. If the RS structure and procedures are transparent and have clear entrance and departure criteria, such situations could not have much legal support. It will be crucial in this situation to be clear up front that the firm entering the RS will be responsible for any business or consumer risks.
Eligibility Criteria
Subject to meeting the sandbox requirements outlined in these guidelines, the target candidates for entrance into the RS are FinTech enterprises, including startups, banks, financial institutions, and any other organization that partners with or supports financial services organisations.
The RS will be focused on supporting innovations intended for use in the Indian market in areas where:
- There are no governing regulations;
- Temporary easing of regulations is required to enable the proposed innovation; and
- The proposed innovation has the potential to significantly ease or affect the delivery of financial services.
How the regulatory sandbox is designed?
The RBI will think about the following when designing the RS:
Sandbox for regulation Age groups and products, services, and technology
The RS may run a few cohorts (end-to-end sandbox process), where a small number of entities test their products for a set amount of time. The RS will be based on groups with similar interests, such as financial inclusion, payments and lending, digital Know Your Customer (KYC), etc. The cohorts can last for different amounts of time, but they should usually be done within six months. Below is a list of innovative products, services, and technologies that could be put to the test under RS.
- Retail payments
- Money transfer services
- Marketplace lending
- Financial advisory services
- Wealth management services
- Digital identification services
- Smart contracts
- Financial inclusion products
- Cyber security products
Innovative Products/Services
Innovative Technology
- Mobile technology applications (payments, digital identity, etc.)
- Data Analytics
- Application Program Interface (APIs) services
- Applications under block chain technologies
- Artificial Intelligence and Machine Learning applications
Applicant Regulatory Requirements/Relaxations
On a case-by-case basis, the RBI may consider waiving certain of the regulatory criteria for applicants for the period of the RS. Listed below are a few instances of regulatory relief that may be granted:
- Requirements for liquidity
- Composition of the Board • Management Experience
- Financial Stability
- Track Record
However, the following are the mandatory standards that all candidates must meet:
- Customer privacy and data protection
- Secure storage and access to stakeholders' payment data
- Transaction security
- KYC/AML/CFT standards
- Statutory constraints
Sandbox Testing Exclusion
If the proposed financial service is similar to those already available in India, the entities may not be eligible for the RS unless the applicants can demonstrate that either a different technology is being profitably applied or the same technology is being applied in a more efficient and effective manner.
Regulatory Sandbox Enabling Framework
A preliminary negative list of
products/services/technology that may be rejected for testing is provided below.
- •Credit registry
- Credit information
- Services for crypto currency/crypto assets
- Trading/investing/settling in crypto assets
- Initial Coin Offerings (ICOs), etc.
- Chain marketing services
- Any product/services prohibited by regulators/the Government of India
Fit and Proper Criteria for RS Participant Selection
Each candidate must meet the following requirements:
According to Annex
each director must sign a statement and provide an assurance to this effect.
(a) It must be an Indian-incorporated and registered firm or an Indian-licensed bank. Furthermore, financial institutions established under an Indian legislation would be eligible.
(b) According to its most recent audited balance statement, the firm must have a minimum net value of Rs. 25 lakh.
(c) The entity's promoter(s)/director(s) must be fit and appropriate according to the requirements outlined in Annex
(d) The entity's and its promoters'/directors' bank accounts should be in good standing.
(e) The promoter(s)/director(s)/entity's credit history must be adequate.
(f) It should indicate that the products/services are technologically ready for commercial deployment.
(g) The firm must show mechanisms to guarantee compliance with current consumer data protection and privacy regulations/laws.
(h) Adequate protections shall be established into its IT systems to protect it against unauthorised access, modification, destruction, disclosure, or dissemination of records and data.
Regulatory Sandbox Enabling Framework
I The organisation should have a solid IT infrastructure and management resources. The IT systems utilised for end-to-end sandbox processing must ensure information processing integrity from beginning to finish.
The entities must also meet the following requirements:
(a) The suggested FinTech solution should highlight an existing gap in the financial ecosystem and show how it would fix the issue, benefit customers or the industry, and/or execute the same function more effectively. Alternatively, applicants should demonstrate that there is a relevant regulatory barrier preventing the product/service from being deployed at scale, or that a genuinely innovative and significantly important product/service/solution is proposed for which relevant regulation is required but not present.
(b) The RS experimentation's test scenarios and anticipated results should be clearly stated, and the sandbox entity should report to the RBI on the test progress on an agreed-upon timeline.
(c) In order for the RS to be effectively conducted while adequately safeguarding consumers' privacy, the required boundary criteria (see to section 6.7) must be explicitly established.
(d) In the event that the planned FinTech-driven financial service must be stopped or may proceed to be launched on a larger scale after quitting the RS, a suitable departure and transition strategy shall be explicitly established.
(e) Before being admitted to RS for testing, candidates must provide the findings of their Proof of Concept (PoC)/testing of use cases, as well as any relevant past experiences.
(f) Significant risks associated with the proposed FinTech solution or financial service must be analysed and a mitigation strategy must be produced.
The RS is a new regulatory effort designed to promote responsible innovation in financial services while closely monitoring and mitigating risks. Entities for a cohort must, among other things, meet the fit and suitable standards outlined in paragraphs 6.5.1 and 6.5.2 above. If there are a high number of applications, compliance with fit and suitable criteria will be required, and the final selection will be based on the uniqueness of the invention and the potential advantage that the product/service delivers to the consumers/industry.
RS Extending or Exiting
a) At the conclusion of the sandbox term, the regulatory reliefs granted to the entities will expire, and the sandbox entity will be required to quit the RS. If the sandbox entity seeks an extension of the sandbox term, it must apply to the RBI at least one month before the expiry date and provide appropriate grounds for the extension. Based on the stage of the testing, the results of the testing up to that point, reason for its continuation, and the predicted outcome in the extended time, the RBI must make an informed decision to authorise extension or not.
b) Sandbox testing shall be terminated at the RBI's discretion at any time: I if the sandbox entity fails to accomplish its intended purpose, based on the most recent test scenarios, anticipated results, and timeline mutually agreed upon by the sandbox entity and the RBI.
ii) if the sandbox entity is unable to fully comply with the applicable regulatory requirements and other criteria stated at any stage of the sandbox procedure.
iii) if the sandbox entity failed to act in the best interests of consumers owing to carelessness or criminal intent.
c) The sandbox entity may also opt out of the RS at any time by notifying the RBI one month in advance.
d) Before departing or ending the RS, the sandbox firm must ensure that any current commitment to its clients of the financial service under experimentation is adequately resolved.
a) At the conclusion of the sandbox term, the regulatory reliefs granted to the entities will expire, and the sandbox entity will be required to quit the RS. If the sandbox entity seeks an extension of the sandbox term, it must apply to the RBI at least one month before the expiry date and provide appropriate grounds for the extension. Based on the stage of the testing, the results of the testing up to that point, reason for its continuation, and the predicted outcome in the extended time, the RBI must make an informed decision to authorise extension or not.
b) Sandbox testing shall be terminated at the RBI's discretion at any time: I if the sandbox entity fails to accomplish its intended purpose, based on the most recent test scenarios, anticipated results, and timeline mutually agreed upon by the sandbox entity and the RBI.
ii) if the sandbox entity is unable to fully comply with the applicable regulatory requirements and other criteria stated at any stage of the sandbox procedure.
iii) if the sandbox entity failed to act in the best interests of consumers owing to carelessness or criminal intent.
c) The sandbox entity may also opt out of the RS at any time by notifying the RBI one month in advance.
d) Before departing or ending the RS, the sandbox firm must ensure that any current commitment to its clients of the financial service under experimentation is adequately resolved.
Conditions of Limitation
When the RS is used in a production setting, it must have a well-defined space and duration for launching the proposed financial service, during which the repercussions of failure may be contained. The proper boundary conditions must be explicitly stated in order for the RS to be effectively implemented while adequately safeguarding consumer interests.
The RS's boundary conditions may include the following:
- RS start and finish dates
- Target customer type
- Transaction limitations or cash holding restrictions
- Limits on the number of consumers engaged
- Limit customer losses
Consumer Safety
Before entering or ending the RS, the sandbox company must ensure that any current commitments to users of the financial service under experimentation are satisfied or addressed Enabling Framework for Regulatory Sandbox.
It should be emphasised that participating in the RS does not minimise the sandbox entity's obligation to its clients.
Entities joining the RS must advise test consumers of any risks and available compensation upfront and transparently and gain their express agreement in this respect. There should be a suitable framework in place for clients to withdraw from the test.
Sandbox entities must get liability/indemnity insurance in an acceptable quantity and for a sufficient length of time to protect the interests of their consumers. The adequacy of indemnity coverage will be determined by determining the maximum liability based on factors such as
(i) maximum exposure to a single customer,
(ii) the number of claims that could arise from a single event (potential for multiple claims), and
(iii) the number of claims that could be expected during the policy period. The policy period will commence with the start of the testing stage and terminate three months after the sandbox entity exits the RS.
The Stages of the Regulatory Sandbox Process
Complete Sandbox Process
The FinTech Unit (FTU) will supervise a complete end-to-end sandbox procedure, including product/innovation testing by FinTech businesses, under the overall leadership of the Inter Departmental Group (IDG) of the RBI, with the involvement of domain experts.
The Sandbox Process: Timelines and Stages
Each RS cohort must follow the five phases and timetable outlined below:
Initial Screening
This phase may run up to four weeks after the application window closes. The FTU will receive the applications and assess them in order to identify individuals who match the qualifying requirements. The FTU must guarantee that the candidate understands and adheres to the RS's objectives and ideals.
Test Design This phase might take up to four weeks. Through iterative interaction with the applicants, the FTU will complete the test design and define outcome criteria for assessing evidence of benefits and hazards.
Application Evaluation This step might take three weeks. The FTU will review the test design and, if necessary, suggest regulatory changes.
Regulatory Sandbox Enabling Framework
Testing This phase may take up to 12 weeks. By closely monitoring the experiments, the FTU will develop empirical data to evaluate them.
Evaluation This phase might take up to four weeks. The RBI will validate the final conclusion of testing products/services/technology against the required characteristics, including viability/acceptability under the RS. The FTU will evaluate the test results and determine if the product /service is feasible and acceptable under the RS.
8. Statutory and Legal Considerations
8.1 Upon acceptance, the applicant is designated as the sandbox entity in charge of functioning in the RS. For the period of the RS, the RBI will give adequate regulatory assistance by easing particular regulatory requirements (which the sandbox business would otherwise be subject to). The RBI accepts no responsibility originating from the sandbox procedure, and any liability emerging from the experiment is borne by the applicant as a sandbox company.
8.2 Following successful experimentation and removal from the RS, the sandbox firm must fully comply with all applicable regulatory requirements. The candidate must well comprehend the RS's goal and ideals. It should be underlined that the RS is not intended and cannot be used to avoid legal and regulatory obligations.
8.3 The sandbox entity must quit the RS at the conclusion of the sandbox time.
9. Transparency and Openness
9.1 It is critical to reach out to stakeholders and provide clear and appropriate information about the RS. Through its official website, the RBI will broadcast the full sandbox process, including its debut, cohort topic, successful applicants chosen for RS, entrance and exit criteria, and products/services judged feasible and acceptable under the RS.
9.2 The RBI reserves the right to post any relevant information regarding RS applicants on its website, including for the sake of knowledge transfer and cooperation with other international regulatory agencies, without disclosing any proprietary/intellectual property rights-related information.
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