Bank Negara proposes amendments to the Fintech Sandbox Framework

Bank Negara Malaysia (‘BNM’) issued an Exposure Draft of the Policy Document on Financial Technology Regulatory Sandbox Framework (‘Exposure Draft’) on 28 March 2023.
 
When the policy document arising from the Exposure Draft is issued, it will replace BNM’s Policy Document on Financial Technology Regulatory Sandbox Framework issued on 18 October 2016 (‘Existing Policy Document’).
 
As in the case of the Existing Policy Document, the replacement document will apply to:
a. a financial institution, namely:
an authorised or registered person under the Financial Services Act 2013 (‘FSA’);
an authorised person under the Islamic Financial Services Act 2013 (‘IFSA’);
a licensee under the Money Services Business Act 2011 (‘MSBA’); and
a prescribed financial institution under the Development Financial Institutions Act 2002;
b. a fintech company (‘fintech company’) which collaborates with a financial institution;  
c. a fintech company intending to carry on:
an authorised or registered business as defined in the FSA;
an authorised business as defined in the IFSA; or
a money services business as defined in the MSBA.
A fintech company is a company that utilises or plans to utilise technology or any other innovation in the provision of financial services (‘fintech’).
 
The Exposure Draft proposes to introduce two key enhancements to the Existing Policy Document:
a. the simplification of the existing Stage 1 eligibility assessment criteria of the standard sandbox pathway; and
b. the introduction of the Innovation Green Lane (‘Green Lane’), a risk-proportionate accelerated track to facilitate faster testing of innovative solutions in the fintech sandbox by financial institutions with strong track record in risk management, governance and compliance capabilities.
Standard Sandbox
 
The Exposure Draft proposes that the application to participate in the standard sandbox be divided into two stages, namely:
Standard Sandbox Stage 1 – Eligibility; and
Standard Sandbox Stage 2 – Preparation.
Stage 1 - Eligibility
 
To be eligible to participate in the sandbox through the sandbox standard procedure, the applicant must satisfy five criteria:
 
Criteria 1: Identification of the regulatory impediment
The proposed solution is wholly or partly incompatible with existing laws, regulations and standards administered by BNM;
 
Criteria 2: Value Proposition
The proposed solution is innovative with clear potential to improve accessibility, efficiency, or quality of financial services, or enhance the effectiveness of risk management in financial services;
 
Criteria 3: Business Plan and State of Readiness
The applicant is reasonably resourced to run a prototype within three months from the time of application (or such longer period as may be allowed);
 
Criteria 4: Risk Management
The applicant has adequate resources and ability to identify and mitigate risks associated with its proposed solution in a manner that is proportionate with the projected scale of business activity and its nature of risk; and
 
Criteria 5: Fit-and-proper
The applicant has a proven track record in demonstrating the credibility and integrity of its key management personnel and persons with significant decision-making authority in the proposed solution.
 
BNM will endeavour to inform the applicant of its eligibility to participate in the sandbox within 15 working days after receiving a complete set of information necessary for the assessment. Eligibility to participate in the sandbox does not constitute approval for testing the proposed solution in the sandbox. Stage 1 serves to inform the applicant of its potential suitability to participate in the sandbox and to help the applicant with its business and resource planning.

Stage 2 – Preparation
 
Once the applicant is deemed eligible to participate in the sandbox, it will proceed to Stage 2 of the standard sandbox procedure, i.e. the preparation stage. In Stage 2, BNM will consider whether to approve the applicant to test a solution in the sandbox based on the applicant’s ability to satisfy the following:
a. the applicant must demonstrate the practical feasibility of its solution via a prototype and the readiness of its front-end and back-end infrastructure supplemented by proper product documentation (e.g. functional, technical design document, user guide, etc.); 
b. the applicant must demonstrate it has sufficient resources to support the testing of its solution in the sandbox prior to live testing with proper evidence (such as letter of funding); and
c. the applicant must be able to identify the potential risks to financial institutions and financial consumers that may arise from the testing of the solution in the sandbox and propose appropriate safeguards to address the identified risks.1
​Concurrently with the above, BNM will engage the applicant on the following:
a. the testing parameters, such as the scope and duration of the test, regulatory flexibilities requested and reporting frequency;
b. the specific measures to determine the success or failure of the test at the end of the testing period;
c. an exit strategy if the test fails or is discontinued; and
d. a transition plan for the deployment of the solution on a commercial scale upon successful testing and exit from the sandbox.
Innovation Green Lane
 
According to BNM, the Green Lane is introduced to cater to industry developments since the sandbox was first established in 2016. In this regard, BNM noted that financial institutions have gradually increased their appetite and resources for iterative deployment of small-scale projects to test new ideas and solutions.
 
The Green Lane is an alternative to the standard sandbox procedure. It seeks to provide a simpler and faster way for financial institutions to continuously test innovative solutions that face regulatory impediments.
 
The eligibility of a financial institution to participate in the sandbox through the Green Lane involves two levels of assessment:
a. a one-off assessment of a financial institution’s risk management, compliance and governance capabilities to determine approval to utilise the Green Lane; and
b. subsequent simplified registration procedures for approved Green Lane participants to test individual solutions that face regulatory impediments.
Application Procedure and Assessment Process
 
Only financial institutions (and not fintech companies) are eligible to apply for the Green Lane. Applications by financial institutions to use the Green Lane may include collaborations with fintech companies. However, BNM reserves the right to determine whether such collaborations should be tested in the sandbox through the Green Lane or the standard sandbox procedure.
 
Financial institutions intending to utilise the Green Lane are expected to have a strong track record in risk management, compliance and governance. In considering whether to approve a financial institution to participate in the sandbox through the Green Lane, BNM will assess a financial institution’s risk management, compliance and governance capabilities based on its existing track record.2
 
BNM will endeavour to inform the financial institution of its decision to approve the latter’s participation in the sandbox through the Green Lane within 30 working days of receiving a complete application.
 
Upon its application to participate in the sandbox through the Green Lane being approved, the financial institution will be deemed as a participating institution3. An approval to utilise the Green Lane is renewed automatically on an annual basis, unless it is revoked by BNM.4
 
Qualified Projects – Parameters and Safeguards
 
A participating institution approved to utilise the Green Lane may avail itself to a simplified registration procedure to commence testing of new solutions in the Green Lane subject to the following:
a. A participating institution intending to test solutions offered to the general public must take practical measures to limit the offering to 10,000 unique individual persons or business entities throughout the testing period which shall not exceed 12 months;
b. A participating institution must consider the potential direct financial losses related to its solution that all customers and entities may suffer and provide appropriate recompense should such a risk materialise;  
c. A participating institution must inform BNM of its intention to test any new solution at least 15 working days before the planned date for its testing, such notification is referred to as a ‘registration’ of a Green Lane project.5
A participating institution may proceed with the testing of the registered Green Lane project on the proposed testing date if BNM has not expressed concern or prohibited the project. The regulatory flexibilities listed by the participating institution in the registration are deemed to have been given by BNM, subject to the expiry or revocation of the approval to participate in the sandbox or any written instruction from BNM to discontinue the testing of the particular registered Green Lane project.
 
Other Requirements
 
The provisions in the Exposure Draft relating to the application requirements, expiry and revocation of approval, and submission of periodic and final reports to BNM are substantially similar to the corresponding provisions in the Existing Policy Document.
 
Feedback on Exposure Draft
 
Feedback on the Exposure Draft may be submitted to BNM in hardcopy or preferably, by electronic submission, by 30 May 2023.
 
Comments
 
The Exposure Draft is the first revision of the Existing Policy Document since it came into effect on 18 October 2016. The introduction of a two-staged application procedure for a standard sandbox application and in particular, an expedited procedure for testing of a proposed solution under the Green Lane will be welcomed by stakeholders, especially financial institutions. Fintech companies may be disappointed at their exclusion from having direct access to the Green Lane. Perhaps the next major step for the Malaysian sandbox framework will be the granting of access to the Green Lane to qualified fintech companies.
 
Alert by Lee Ai Hsian (Partner) of the Fintech Practice of Skrine. 
 

1 Refer to paragraphs 6.7 and 6.8 of the Exposure Draft for factors that BNM will consider in terms of risks and risk mitigation measures.
2 Refer to paragraph 7.7 of the Exposure Draft for further details.
3 A ‘participating institution’ is defined in paragraph 5.2 of the Exposure Draft as a financial institution which has been approved by BNM to participate in the sandbox.
4 Refer to paragraphs 7.10 to 7.13 of the Exposure Draft for more information on revocation of a Green Lane approval.
5 Refer to paragraphs 7.17 and 7.18 for further details of matters to be considered in registering a Green Lane project.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.