Monetary Authority of Singapore issues FinTech regulatory sandbox guidelines

The MAS’ approach of encouraging innovation is clear from the introduction of the Sandbox Guidelines, where it states that a “key driver to transforming Singapore into a smart financial centre is the provision of a regulatory environment that is conducive for innovative use of technology”. The regulatory sandbox approach is intended to ensure that financial institutions and start-ups do not end up stifling promising innovations when unsure of whether a new financial service complies with current legal and regulatory requirements.

An applicant can apply to enter the regulatory sandbox (“sandbox”) to experiment in a production environment. Upon approval, during the duration of the sandbox, certain legal and regulatory requirements will be relaxed. The MAS will determine the specific requirements it is prepared to relax for each case, taking a risk-based approach. These requirements include the asset maintenance requirement, board composition, cash balance, capital adequacy, management experience, technology risk management and outsourcing guidelines, and minimum liquid assets. However, the MAS has indicated that it intends to maintain certain requirements such as those relating to confidentiality of customer information, the fit and proper criteria, handling of customers’ monies and assets, and the prevention of money laundering and countering the financing of terrorism.

The main evaluation criteria for inclusion in the sandbox as set out in the Sandbox Guidelines are as follows:

1. the proposed financial service includes new or emerging technology, or uses existing technology in an innovative way. It should not be similar to a service that is already being offered in Singapore unless the applicant can show that a different technology is being applied, or the same technology is being applied differently;
2. the proposed financial service addresses a problem or brings benefits to consumers or the industry;
3. the applicant has the intention and ability to deploy the proposed financial service in Singapore on a broader scale after exiting the sandbox. For the avoidance of doubt, the deployment on a broader scale is not limited to Singapore;
4. the test scenarios and expected outcomes of the sandbox experiment should be clearly defined and the sandbox entity should report to the MAS on the test progress in a timely manner;
5. boundary conditions must be appropriately defined, balancing the objectives of a meaningful sandbox experiment while protecting the interests of consumers and maintaining the soundness of the financial services industry;
6. significant risks arising from the proposed financial service should be assessed and mitigated. The applicant should also demonstrate that it has conducted sufficient due diligence, including testing the proposed service in a laboratory environment, and being aware of the legal and regulatory requirements for deploying the proposed financial service if not for the sandbox; and
7. an exit and transition strategy should be clearly defined, both for situations where the proposed financial service should be discontinued, or deployed on a larger scale.

The MAS has highlighted that the sandbox entity must be able to fully comply with all legal and regulatory requirements at the end of the sandbox period. In this regard, the sandbox entity has the responsibility to ensure that there is a plan in place to meet these requirements. Extensions of the sandbox period may be granted at the discretion of the MAS on a case by case basis.

There is no fee for the application to enter the sandbox. Prior to submitting an application, the applicant can clarify any queries it may have directly by contacting the MAS via email. During the application stage, the MAS will review the application and endeavour to provide a preliminary indication to the applicant of its potential suitability for the sandbox within 21 working days. The application will then proceed to the evaluation stage where the applicant will be allowed to make adjustments to the application and during which the proposed financial service as well as the regulatory support required is assessed. While there is no fixed time period for evaluation, the MAS has reaffirmed its commitment to the objectives of the sandbox and will closely monitor the time taken to evaluate each application.

If the application is rejected, the applicant may reapply at any time once it is ready to meet the objective, principles and evaluation criteria of the sandbox.

Upon approval at the evaluation stage, the sandbox entity will be launched into the experimentation stage. The sandbox entity must notify its customers that the financial service is operating in a sandbox and clearly disclose all associated key risks. The customers must acknowledge that they have read and understood these risks. The sandbox entity must also ensure that all existing obligations to customers under experimentation must be fully satisfied or addressed prior to exiting or discontinuing the sandbox.

In the Sandbox Guidelines (and its accompanying FAQs), the MAS has shown that it is cognizant of the need for industry players to test the viability of new and innovative financial services in a cost effective and timely manner, and of its role in facilitating this process. The regulatory approach and attitude taken by the MAS to promote FinTech experimentation and the adoption of technology in the financial sector is encouraging and will definitely go towards achieving the development of Singapore as a smart financial centre.