Regulatory Sandbox framework "EMPOWER IAS"

In news:

• The International Financial Services Centres Authority (IFSCA) has introduced a framework for Regulatory Sandbox to tap into innovative Fin-tech solutions.

 

What is a regulatory sandbox?

• A regulatory sandbox is a safe harbour, where businesses can test innovative products under relaxed regulatory conditions. Typically, participating companies release new products in a controlled environment to a limited number of customers for a limited period of time.

 

Significance and benefits of a regulatory sandbox:

1. The “regulatory sandbox” will help fintech companies launch innovative products at a lower cost and in less time.
2. The sandbox will enable fintech companies to conduct live or virtual testing of their new products and services.
3. These companies will also be able to test the viability of the product without a wider and expensive rollout.
4. It will help companies to experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.

 

Need:

1. According to NITI Aayog, India is one of the fastest growing fintech markets globally, and industry research has projected that $1 trillion, or 60% of retail and SME (small and medium sized enterprises) credit, will be digitally disbursed by 2029.
2. The Indian fintech ecosystem is the third largest in the world, attracting nearly $6 billion in investments since 2014. Fintech or financial technology companies use technology to provide financial services such as payments, peer-to-peer lending and crowdfunding, among others.
3. Therefore, in order to protect customers and safeguard the interests of all stakeholders, and streamline their influence on the financial system, there is need for a regulatory and supervisory framework for fintech firms.

 

Its inception

• The concept of a regulatory sandbox or innovation hub for fintech firms was mooted by a committee headed by then RBI executive director Sudarshan Sen.
• The panel submitted its report in Nov 2017 has called for a regulatory sandbox to help firms experiment with fintech solutions, where the consequences of failure can be contained and reasons for failure analysed.
• If the product appears to have the potential to be successful, it might be authorised and brought to the broader market more quickly.

 

What is the new framework?

• IFSCA has introduced a framework for “Regulatory Sandbox”.
  Under this Sandbox framework, entities operating in the capital market, banking, insurance and financial services space shall be granted certain facilities and flexibilities.
• It will experiment with innovative FinTech solutions in a live environment with a limited set of real customers for a limited time frame.
• These features shall be fortified with necessary safeguards for investor protection and risk mitigation. The Regulatory Sandbox shall operate within the IFSC located at GIFT City (Gandhinagar).
• IFSCA shall assess the applications and extend suitable regulatory relaxations to commence limited purpose testing in the Sandbox.

 

Other Propositions

• As additional steps towards creating an innovation-centric ecosystem, the IFSCA has proposed the creation of an “Innovation Sandbox”.
• It will be a testing environment where Fin-tech firms can test their solutions in isolation from the live market.
• This would be based on market related data made available by the Market Infrastructure Institutions (MIIs) operating in the IFSC.
• The Innovation Sandbox will be managed and facilitated by the MIIs operating within the IFSC.