Singapore: Entering the Sandbox – Guidelines released for FinTech entrepreneurs and entities

Guidelines on entering the Sandbox

On 16 November 2016 the Monetary Authority of Singapore (MAS) released its “regulatory sandbox” (Sandbox) guidelines for FinTech experiments to be conducted in a controlled environment after incorporating market feedback and road-testing against actual applications and potential experiments that may enter the Sandbox soon.

Given that the financial services industry is heavily regulated and touches our lives in many ways on a daily basis (from opening a bank account to payments to investments and more), the purpose of setting up the Sandbox is to allow finance technology (FinTech) experiments to take place within a controlled environment where legal and regulatory requirements are relaxed in certain relevant aspects in order for the new technology to be tested before being applied on a broader scale.

MAS recognizes that innovation in finance is key to enabling solutions that utilise technology to deliver financial products or services more efficiently and can make our lives better, but innovation may be curtailed if a heavy-handed or risk-adversed approach is taken through the strict imposition of regulations on such services or products. There would also be regulatory compliance costs and legal considerations that may put off budding innovations which may otherwise improve operations in the financial services industry.

MAS has therefore taken this pro-active approach of allowing a controlled environment for FinTech experiments where the cost and weight of regulatory compliance can be relaxed for the duration of the Sandbox and balanced in proportion to the risk posed by such upcoming technologies (especially where it is not possible for a start-up to anticipate every risk or meet regulatory requirements).  If the experiment succeeds, then such an entity can ‘exit the sandbox’ and be applied on a broader scale. In the event, however, should the experiment not succeed while in the Sandbox, then it would fail safely within controlled boundaries where the impact on the public would be minimal, if any

The guidelines are therefore intended to provide clarity on MAS’ expectations on applications to the Sandbox, allow flexibility in approach and criteria, and provide transparency into the process.

Stages of the Sandbox

Briefly, there are three stages in this Sandbox approach – the application stage, evaluation stage and the experimentation stage.

Application stage

At the application stage, an applicant would submit a detailed application to MAS that appears almost akin to a business plan: an applicant defines the problem or pain point; elaborates on how the proposed financial solution is differentiated from what is already in the market; states the legal and regulatory requirements for deploying the proposed financial service; and have tested the solution on a limited basis. It is also expected that an applicant would have planned for the successful application on a wider scale, and also have a plan for the failure of the experiment.

MAS has provided an application template for the Sandbox to guide applicants (and submissions to be done to http://Sandbox Application Template. In addition, another appeal of this Sandbox is that there is no administrative charge for the application.

Evaluation stage

If the application is successful and one enters the Sandbox, MAS and the applicant will jointly define the boundaries within which the experiment will take place. MAS will then determine the specific legal and regulatory requirements which it is prepared to relax, for the duration of the experiment within these boundaries. It is observed that such requirements would likely relate to the operating aspects (such as capital maintenance and management requirements) but certain requirements are still paramount and cannot be relaxed (such as measures against anti-money laundering and customer confidentiality).

Experimentation stage

At the experimentation Stage, the Sandbox entity shall notify its customers that the financial service is operating in a Sandbox and disclose the key risks associated with the financial service. The Sandbox entity is also required to obtain the customers’ acknowledgement that they have read and understood these risks before accessing the product or service.

Concluding thoughts on the Sandbox process

As more applications are approved, further information would be made available by MAS to the public. The author praises the  move as such information would be very helpful in guiding future applications by FinTech firms and entrepreneurs looking to apply technology in an innovative way to provide financial services or products that are likely to be regulated in Singapore.

In addition, after having gone through the Sandbox process, the author believes that successful applicants should also be of greater interest to venture capitalists and investors who are considering Fintech investments – this will be very helpful for the growth of emerging entities looking to scale their operations.

Finally, it is hoped that such successful experiments in the Sandbox would indeed improve our lives and maintain Singapore’s position as a leading financial centre in the world.