We noted last month, [] that three draft regulations for governance of the procedure to set up a regulatory sandbox were issued by the three key regulators of India namely the IRDAI, RBI and SEBI with respect to the insurance, banking and securities market sector, respectively. []
On 26th July 2019, the IRDAI notified the IRDAI (Regulatory Sandbox) Regulations 2019 ("IRDAI RS Regulations"), which mirror the "Draft IRDAI (Regulatory Sandbox) Regulations 2019" of 18th May 2019. The IRDAI also issued the "Guidelines on operational issues pertaining to the Regulatory Sandbox" of 22nd August 2019 ("IRDAI RS Guidelines"), which outline the procedure to be followed for implementing the regulatory sandbox programme.
Shortly after the notification of the IRDAI Regulatory Sandbox Regulations, on 13th August 2019, the RBI published the "Enabling Framework for Regulatory Sandbox" ("RBI RS Framework") which adopts the "Draft enabling framework for Regulatory Sandbox" of 18th April 2019 ("Draft RBI RS Framework") with certain modifications.
IRDAI Regulatory Sandbox Framework
The IRDAI RS Guidelines provide guidance on the operational issues pertaining to the regulatory sandbox. The IRDAI RS Guidelines inter alia deal with the following key aspects:
- Application formats
The IRDAI RS Guidelines stipulate that an applicant desirous of promoting or implementing any innovation in insurance in India by means of insurance regulatory sandbox shall be required to make an application to the IRDAI in FORM-RG-1 in any one or more of the five categories prescribed by the IRDAI RS Regulations.
- Single Point of Contact ("SPOC")
All communication to IRDAI will have to be routed through a SPOC, who shall be appointed for interacting with the applicant and to provide clarity with respect to grey areas not covered by the IRDAI RS Guidelines or IRDAI RS Regulations.
- Completion of Application
An application shall be deemed to be completed if any one of the following criteria is met:
(a) The number of customers reach more than 10,000; or
(b) The total collection of premium crosses ₹50 lakhs; or
(c) Any other parameter decided by IRDAI is met.
Once an application is completed, the product will be considered to be out of the testing phase and the applicant shall be required to submit a report to the IRDAI within 15 days from the date of completion on how the application meets the objectives along with feedback from the participants and any such information as specified by the IRDAI.
- Migration of service/insurance products
The applicant has an option of offering the services/insurance products, after successful testing, on a regular basis in the market, on the same lines as any other services/insurance products under the extant applicable regulatory and statutory framework. However, if the services/insurance products are discontinued, then the applicant shall be required to honour the existing liabilities in accordance with the agreed terms and conditions of the services/insurance products.
- Consent, Confidentiality and Data Security
The applicant shall be required to obtain an informed consent from the customers participating in the proposal in respect of the fact that the outcomes of the service/insurance product are not certain.
The IRDAI RS Guidelines also stipulate that it is the duty of the applicant to ensure the complete confidentiality and security of the personal information of the customer, as collected by the applicant.
RBI Regulatory Sandbox Framework
The RBI RS Framework sets out the norms for enabling the regulatory sandbox in the banking sector. The RBI RS Framework adopts Draft RBI RS Framework with the following key modifications:
- Criteria for application
The criteria for application has been relaxed, and under the extant norms, a company incorporated and registered in India or a bank licensed to operate in India or a financial institute constituted under an Indian statute can apply for the regulatory sandbox. Further, the applicant is required to maintain a net worth of more than ₹25 lakh under the extant framework as opposed to a net worth of more than ₹50 lakh stipulated under the Draft RBI RS Framework.
- Criteria for judging the proposals
The selection of entries shall be based on inter alia, the conformity with the "fit and proper criteria" stipulated by the RBI RS Framework.
However, if a large number of proposals are received then the compliance with the "fit and proper criteria" shall be taken as a condition precedent for judging the proposal and the final selection shall be based on:
(a) The novelty of the innovation;
(b) The potential benefit which the service/product might bring to the customers/industry.
- Indemnity Insurance
The applicant shall be required to take a liability/indemnity insurance of an adequate amount and for an adequate time-period, to safeguard the interests of the customers enrolled in the proposal. The adequacy of the insurance cover shall be dependent on the following factors:
(a) The maximum exposure to a single customer;
(b) The potential number of claims that could arise from a single event;
(c) The number of expected claims over the insurance policy period.
- Exiting the Regulatory Sandbox
The applicant may exit the regulatory sandbox at its own discretion by informing the RBI. The applicant is required to inform the RBI one month prior to exit.
The IRDAI has invited applications for the regulatory sandbox and has provided a window for submission of applications from 15th September 2019 to 14th October 2019 and has also appointed Mr Sanjay Verma DGM (Distribution Development) as the SPOC. The RBI is yet to release the dates for submission of applications for the regulatory sandbox.
The banking and insurance players are calling the sandbox move a game changer, but it remains to be seen, how such the regulatory sandbox will be utilised by market players and whether the customers will be equally enthusiastic to purchase innovative products.
 A regulatory sandbox refers to an environment created by the relevant regulatory authority to provide market players with an opportunity to safely and securely execute and test their innovative products, services, business models and delivery mechanisms, in an orderly manner, which aims at protecting the customers and at the same time safeguarding the interest of the stakeholders.
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