Bank Negara Malaysia (BNM) intends to issue a new Financial Technology Regulatory Sandbox Framework, replacing the initial one issued in 2016, as an evolving landscape calls for a more efficient mechanism to test digital solutions.
The exposure draft for the proposed framework focuses on two main enhancements: simplifying the Stage 1 eligibility assessment criteria of the standard two-level sandbox pathway and introducing the Innovation Green Lane, a risk-proportionate accelerated track to facilitate faster testing.
“Based on engagements with sandbox applicants thus far, it is noted that the rigor of eligibility assessment may be challenging for early stage fintech start-ups to navigate. Difficulty in securing eligibility to participate in the sandbox has often led to challenges for applicants to secure necessary resources to support further development of their solutions,” BNM noted in the exposure draft, viewed by IFN Fintech.
The regulator has proposed allowing it to assess the value proposition of a new solution at a conceptual level and to validate it during the testing period, instead of requiring upfront evidence on how it can address market gaps and inefficiencies. BNM would also provide greater room for applicants to develop and demonstrate their risk management capability. It is suggesting a three-month timeframe for applicants to deploy their solution for testing under the sandbox.
The central bank emphasized that the simplification of eligibility assessment should not be misconstrued as a loosening of safeguards or lowering of standards of entry to the sandbox.
Innovation Green Lane
The Green Lane is an alternative to the standard sandbox track which should reduce compliance cost and speed up time-to-market for financial institutions in carrying out market validation trials of new solutions. It is open to financial institutions, but not fintech companies, although applications may include collaboration with fintech firms.
Essentially, it is hoped that with the Green Lane, financial institutions would be encouraged to continue to test ideas and solutions rather than exclude them in the face of regulatory impediments. Applications for the Green Lane is also through two stages.
“Where an Islamic solution is concerned, an attestation by the participating institution’s Shariah committee that the new solution to be tested is consistent with prevailing rulings of [BNM]’s Shariah Advisory Council (SAC). In the event that there are no Shariah rulings made by SAC in relation to the new solution, the appointed Shariah committee of the participating institution shall deliberate such matters and provide recommendations on whether the solution is in line with Shariah principles,” noted the exposure draft.
BNM is currently accepting feedback from the market on the exposure draft until the 30th May 2023.
BNM’s regulatory sandbox has received over 110 applications in the last six years. The sandbox has been used to test various new technologies and business models including P2P Takaful, buy-now-pay-later and digital remittance as well as digital insurance.