Standard Operating Procedure for Inter-Operable Regulatory Sandbox

Standard Operating Procedure for Inter-Operable Regulatory Sandbox

The Inter Regulatory Technical Group (IRTG) on Fintech has prepared a detailed Standard Operating procedure for the Inter-Operable Regulatory Sandbox. IRTG has been constituted under the aegis of the Financial Stability and Development Council- Sub Committee (FSDC-SC). For expert comments and advice, the members from the Ministry of Finance, Ministry of Electronics and Information Technology, Department of Economic Affairs and Department of Economic affairs. The discussion primarily revolved around the hybrid dealing of the regulatory sandboxes around different regulators of fintech in the country. All the Financial regulators in India, namely the RBI, SEBI, IRDAI, IFSCA and PFRDA, have adopted a Standard Operating Procedure prepared by the IRTG. This blog aims at decoding the standard operating procedure adopted by the regulators for strategic testing of Fintech Products.

What is a Regulatory Sandbox?

A regulatory sandbox is a regulatory framework created to test the new products/services developed in a controlled/tested regulatory environment. A regulatory sandbox enables the regulators to provide a safe testing atmosphere for testing new products with potential customers and note down the advantages/risks posed by these financial products. These regulatory sandboxes enable very dynamic and result-oriented testing of new fintech products before releasing them in the market.

Detailed SOP on Inter-Operable Regulatory Sandbox

The following standard operating procedure has been adopted for the Inter-Operable Regulatory Sandbox.

Background of the Notification

This facility has been established to obviate the needs of innovators of testing products/ services that fall under the ambit of more than one regulatory authority. Inter-operable Regulatory Sandbox (IoRS) is a regulatory mechanism that will facilitate the testing of hybrid fintech products in a regulated manner.

Participants and Products of the IoRS.

Member Fintech entities of the IRTG who have fully consented to the IoRS will be eligible to participate in the scheme. Another essential element of participation is that the product or service of such member should fall within the ambit of the regulators for eligible testing of the products.

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Governance of the Applicants under the IoRS

  • The nodal point for receiving all applications under the scheme shall be the FinTech department of the RBI, designated as a Coordination Group. The committed will be provided with all the secretarial support for regulating and formulating all applications under the scheme.
  • The application shall be made to the Coordination group in the format prescribed by the Reserve Bank of India in the circular, the assessment will be done on the basis of the framework of the product and services and under which regulatory authority its operation falls. The Principal Regulator and Associate Regulator(s) will be decided according to the dominant feature of the product introduced.  
  • Two sets of factors will be taken into account for the assessment of the dominant feature.
    • The enhancement sought by the introduced product and service to the existing products and services such as deposits, loans market instruments, pension products etc.
    • The relaxation sought by the introducing entity for the testing of such product in the regulatory sandbox
  • The dominant feature will be decided on the weightage of the relaxation sought by the applicant, the PR/AR will monitor these requests, and their decision will be final and binding on the applicants.
  • After consideration of networth, eligibility criteria and dominant feature for the Regulatory sandbox of the concerned principal is applicable for the entity for participation in IoRS.
  • The Coordination Group on Fintech RBI will perform the preliminary scrutiny on the basis of eligibility criteria of the regulator under whose purview the innovation falls. After such enquiry, the application is forwarded to the concerned PR and AR(s) for further processing.
  • For an easy and non-disruptive process, the detailed inspection of the application will be done by the PR on the basis of its framework whilst coordinating with the ARs to assess each and every feature of the product introduced by the applicant entity.
  • If any entity allows only registered entities to participate in the IoRS scheme, then the applicant can enter into an MOU with any regulator-registered entity for participation in the Inter-Operable Regulatory Sandbox; this can be explained with the following illustration:
    • Suppose SEBI is an Associate Regulator of an applicant entity and only allows registered entities under its framework. In that case, the applicant can sign an MOU with the SEBI-registered entity to test their products.
  • IFSCA[1] will serve as the principal regulator for all the Indian Fintech having international ambitions and foreign fintech entities seeking entry into the Indian market. According to this detailed SOP, all applications falling under the above-mentioned purview will be forwarded to IFSCA, and it will act as the Principal Regulator for that applicant entity.
  • Principal Regulators reserve the right of admissibility of the hybrid solution/service/product/ innovation according to its regulatory structure. Their decision should also be communicated to the Coordination Group on Fintech for record and information.
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Role and powers of AR(s) in Inter-Operable Regulatory Sandbox

The relationship between the Principal Regulator and Associate Regulator(s) is specifically determined in the Standard operating procedure for a better resolution and clarity on the functioning of IoRS.

  • AR(s) should provide inputs with regard to the parameters to be tested, boundary conditions, or the risks to be monitored etc. The inputs shall be provided at the earliest but not later than 30 days from the receipt of such notification from the PR.
  • PR will finalise the test design and structure in consultation with the AR(s). In case there is any issue in coordination amongst the PR and AR(s) in reaching a consensus on the treatment of innovative services, business models and products shall be discussed and sorted in the IRTG on fintech before testing the product in the IoRS. The IRTG, in the subsequent meetings, shall monitor all the progress on the testing products under the Inter-Operable Regulatory Sandbox.
  • According to the framework established by the Principal Regulator, a detailed evaluation product will be performed with due insights from the AR(s) on the suitability ad viability of the product.

After a successful exit for the IoRS, the entity has to obtain authorisation from their PR and ARs to seek regulatory dispensation before launching their product in the market. Any decision in this regard shall be final and binding on the applicant entity. The PR and ARs should publish via a press release on their website about the product that is admitted and successfully exited the Inter-Operable Regulatory Sandbox with a specific indication that it is under IRTG Fintech.

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Inter-Operable Regulatory Sandbox will enhance the viability and sustainability of fintech products across the country. This will ensure that all the hindrances faced by the entities whilst seeking approval for making a fintech product that has operations under various regulatory authorities can be approved and tested under their guidance. Various regulators such as SEBI, RBI, IFSCA and others will be cumulatively working on testing new fintech products, which will enhance the functionality and provide tested products to the consumers. The Principal Regulator and Associate Regulator(s) will ensure that the applicant entities get a regulatory environment for testing new fintech products under the aegis of Inter Regulatory Fintech Group. IoRS will enhance the operability and regulation of fintech products in the Indian product.

Read Our Article: Regulatory Sandbox for Fintech / Digital Lending

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