In a crucial move that will impact the way financial service providers innovate and how regulators respond to innovation, the Reserve Bank of India ("RBI") has called for applications to its first cohort of entities under its newly announced Regulatory Sandbox ("RBI RS") under the theme 'Retail Payments'.

Salient Features of the Proposal

To ensure regulatory response to the dynamics of the financial technology and digital banking sector, the RBI set up a Working Group to review global regulatory initiatives in the sector. One of the key recommendations of the Working Group was to set up of a "regulatory sandbox", which it described as 'live testing of financial services in a controlled testing environment, with or without regulatory relief'.

The RBI released a Framework for a Regulatory Sandbox on August 13, 2019 ("Framework"), to allow companies in the field of financial services to conduct field tests and engage with customers while the RBI monitors their activity and contains any financial risks involved, for a limited duration of 6 months. The sectors promoted by the RBI RS, therefore, are those where there is:

  1. an absence of governing regulation,
  2. a need to ease existing regulation, and
  3. potential for easing financial services delivery.

Eligible Participants:

The entities eligible to participate in the RBI RS must be incorporated in India, with a minimum net worth of INR 25 lakhs as per its latest audited balance sheet, and must ensure that its directors meet the required fit-and-proper criteria. The Framework also specifies a 'negative list' of products and services who shall not be accepted within the RBI RS. These include credit registries, credit information services, crypto currencies and trading and sale in crypto assets.

Regulatory relaxations:

Regulatory sandboxes are attractive to players in the market due to the regulatory relief they offer with respect to new products. The Framework highlights the following possible relaxations that may be granted as part of the RBI RS on a case to case basis:

  1. Liquidity requirements
  2. Board composition
  3. Management experience

Quick View

If the RBI RS is implemented in a time-bound manner and is found to be beneficial to all stakeholders, it could inform the experiences of other regulators launching and enabling their own regulatory sandboxes. In May 2019, the Insurance Regulatory and Development Authority of India ("IRDAI") issued the draft IRDAI Regulatory Sandbox Regulations, and called for applications in September. These Regulations also aim to enable innovation in the insurance sector by relaxing IRDAI regulations for a limited duration. In the same month, the Securities and Exchange Board of India ("SEBI") also issued a discussion paper on "Framework for Regulatory Sandbox 2019". The SEBI discussion paper envisages the participation of any market participant registered with SEBI in the sandbox.

The RBI RS potentially allows for the limited regulatory exemptions listed above, but requires its participants to continue compliance with Know-Your-Customer/Anti-Money Laundering norms, consumer protection and data privacy laws, and other statutory compliances. In this regard, the RBI RS framework also places a mandatory requirement on participants to procure 'liability insurance'. Therefore, while easing entry requirements for new products to an extent, the RBI RS still requires a high compliance threshold. Further, the Framework is presently silent on the status of the products and services tested, after exit from the RBI RS. The participating entities must be cognizant of this risk.

The first cohort of the RBI RS is a useful intervention for retail payments products which exist in a regulatory blank space. It is a step in ensuring that market feedback is received prior to framing regulation. While the RBI has hitherto attempted this through its consultation process, the RBI RS has the added benefit of including the experiences and inputs of small market players. The application window for the first cohort is open between November 15, 2019 and December 15, 2019.

19 November, 2019

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