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On 6 June 2016, the Monetary Authority of Singapore (“MAS”) issued a consultation paper inviting comments on a proposed set of Guidelines that would set out the objectives and principles behind a regulatory sandbox (“Sandbox”) for the development and implementation of financial technology (“FinTech”) solutions.
This note provides a brief overview of the proposed Guidelines.
Objectives and Principles of the Sandbox
The MAS has chosen to describe the approach as a sandbox, because that term appears quite appropriate to describe what it intends – namely, a conducive but safe and controlled environment within which one might experiment with FinTech. The MAS themselves acknowledge that experimentation within the Sandbox will still not be entirely free of risks, but such an approach does help to minimise any adverse impact on consumers and financial stability in general, should the experiment fail.
The target audience for the Sandbox approach would be financial institutions (“FIs”), technology firms, and professional services firms that partner with or provide support to FIs and technology firms.
Under the Sandbox approach, an FI or any interested firm (the “Applicant”) will be allowed to experiment in a production environment where actual products or services are provided to customers. However, to address potential failures arising from the experimentation process, the Sandbox is required to include appropriate safeguards to limit and contain the impact of any failure and not affect the overall stability of our larger financial system.
To encourage experimentation, MAS has said that it will render appropriate regulatory support by providing flexibility and relaxing specific legal and regulatory requirements (to which the Applicant would otherwise be subject) for the duration of the Sandbox. The extent to which regulatory requirements may be relaxed will be decided on a case-by-case basis, taking into account the FinTech solution, the Applicant involved and the specific proposal put to MAS.
In particular, MAS has indicated its willingness to consider relaxing requirements such as:
- Asset maintenance;
- Board composition;
- Financial requirements;
- Fund solvency and capital adequacy;
- Licence fees;
- Management experience;
- Liquidity; and
- Reputation and track record.
On the other hand, MAS has also indicated that there would be certain requirements which it would not be willing to relax, and this would include:
- Confidentiality of customer information;
- Fit and proper criteria particularly on honesty and integrity;
- Handling of customer’s moneys and assets by intermediaries; and
- Prevention of money laundering and countering the financing of terrorism.
On the whole, the proposal herein represents a shift from the traditional approach whereby an Applicant would typically be allowed to go forward to operate only if it fully met all of the baseline criteria specified by MAS. Furthermore, at present, the current licensing or regulatory process in relation to an Applicant with a more novel business model has generally tended to be considerably long drawn and protracted.
Sandbox Evaluation Criteria and Exiting from the Sandbox
Procedurally, the proposal is that an Applicant who seeks to deploy a Sandbox must put in a formal application to the MAS, and the consultation paper has proposed the following as the evaluation criteria:
- The FinTech solution should be technologically innovative or applied in an innovative way;
- The FinTech solution should address a significant problem or issue, or bring benefits to consumers or the industry;
- The Applicant intends and should be able to deploy the FinTech solution in Singapore on a broader scale after exiting from the Sandbox;
- The test scenarios and outcomes of the Sandbox should be clearly defined, and progress reports should be made to MAS on an agreed basis;
- The appropriate boundary conditions should be clearly defined, allowing the Sandbox to be meaningfully executed while sufficiently protecting the interests of consumers and maintaining the safety and soundness of the industry;
- Major foreseeable risks arising from the FinTech solution should be assessed and mitigated; and
- An acceptable exit and transition strategy should be clearly defined in the event that the FinTech solution has to be discontinued, or in the event that the FinTech solution is judged to be ready to be deployed on a broader scale after exiting from the Sandbox.
The Sandbox will be for a defined period of time, at the end of which the legal and regulatory requirements relaxed by MAS will expire. At the end of the Sandbox period, if both MAS and the Applicant are satisfied as to the test outcomes, and the Applicant is able to fully comply with the relevant legal and regulatory requirements, MAS will permit the FinTech solution to be deployed on a broader scale.
However, if (i) either MAS or the Applicant is not satisfied that intended outcomes have been achieved; (ii) critical flaws are discovered which cannot be reasonably resolved within the duration of the Sandbox; or (iii) there are any breaches of conditions imposed for the Sandbox, the experimentation within the Sandbox must cease and the FinTech solution must be discontinued.
MAS has also specified several circumstances under which the Sandbox would generally not be considered to be suitable:
- Where the FinTech solution is similar to existing offerings in Singapore;
- Where the Applicant has not tested or verified the viability of the FinTech solution;
- Where the Applicant can reasonably or effectively experiment with the FinTech solution in a laboratory or test environment (i.e. without the Sandbox); or
- Where the Applicant does not intend to deploy the FinTech solution in Singapore on a broader scale after exiting from the Sandbox.
And, as is to be expected, MAS has reiterated that the Sandbox is of course not be used as a means to circumvent existing legal and regulatory requirements.
Application and Approval Process
Indicatively, the timetable for the Sandbox approval process will be as follows:
A. Application Stage
Upon receipt of a complete and final set of information for assessment, MAS will review the application and aim to inform the Applicant within 21 working days whether the matter is suitable for a Sandbox.
B. Evaluation Stage
MAS may make further assessments before approving the Sandbox application. The timeline for this stage is relatively open-ended, and will hinge upon the complexity of the application and the specific legal and regulatory requirements involved. In the interim, given the exploratory nature of the Sandbox approach, the Applicant will be allowed to adjust and refine its application for resubmission following discussions with MAS. At the end of this evaluation stage, the Applicant will be formally notified in writing of the outcome of the Sandbox application.
It appears that one of the key expectations of MAS when evaluating the application for the Sandbox is that there should be a communications plan for the relevant affected customers to be informed that they would be participating in the Sandbox. Indeed, the Application Template included in the consultation paper contemplates that affected customers should be told, amongst other things, of the duration of experimentation within the Sandbox, the boundary conditions and the risks involved.
C. In–Progress Stage
On approval of the Sandbox application, the Sandbox is launched into the In-Progress stage for a fixed duration, upon the expiry of which the Applicant must exit from the Sandbox.
This initiative is to be very much applauded. However, the proposals raise several interesting issues.
First of all, although there are various references in the consultation paper to the Sandbox being a defined environment, within which experimentation on the FinTech solution can be conducted but in such a way that the consequences of failure can be contained, it is noteworthy that no specific legal form or structure for the Sandbox has been specified. This would suggest that MAS does not necessarily expect the FI to deploy the Sandbox in a separate special purpose entity. Yet this in turn raises the obvious question as to what means could then be effective to contain the fallout from a failed experimentation if the Sandbox were not in a segregated legal vehicle. At the same time, it is noteworthy that some of the regulatory requirements, which MAS has identified to be matters that it would be prepared to waive or relax, apply to a legal entity as a whole and thus it may be hard for MAS to waive or relax such a requirement in relation to only part of an organisation but not in relation to the entire organisation.
It would therefore be crucial for MAS to elaborate further on its thinking, perhaps after it has collated and considered all feedback from the present consultation. At the moment, the proposal still lacks a lot of detail. This is perhaps entirely understandable, given that all sorts of FinTech solutions might be put up and it would be hard for policy makers to predict what sort of Sandbox scenarios might be presented for consideration.
Secondly, it appears that any relaxation of existing regulatory requirements during the In-Progress Stage of the Sandbox would be temporary. Once the period of experimentation is over, the usual full set of regulatory requirements would apply. This might take away a substantial part of the benefit accorded by the Sandbox. After all, experimentation within the Sandbox period might suggest that a certain regulatory requirement is not needed or could be modified without comprising established regulatory principles. It is not presently stated in the consultation paper whether in such circumstances, there could be room for MAS to grant a permanent waiver or exemption from a particular regulatory requirement. Hopefully, the regulator would at least be open to such a possibility.
Finally, 21 working days seems to be an unusually generous amount of time that MAS has allocated for itself to arrive at a preliminary decision as to whether a particular project would be suitable for the Sandbox. If innovative FinTech solutions are to be encouraged within Singapore, it is respectfully suggested that the regulator must be suitably configured and resourced to receive, process and respond to Sandbox applications at a much more rapid pace.
The consultation period ends on 8 July 2016.
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