SEBI Plans ‘Regulatory Sandbox’ To Allow Live Testing Of New Products, Services On Select Customers

With an aim to facilitate use of latest fintech innovations in capital markets, regulator Securities and Exchange Board of India is planning to allow live testing of new products, services and business models for selected customers by providing various relaxations and exemptions.

Initially, all SEBI-registered entities will be eligible to participate in such a 'regulatory sandbox' (a live testing environment), while fintech startups and other entities that are not regulated by SEBI may also be allowed at a later stage, but no exemptions would be granted from the existing investor protection framework, KYC and anti-money laundering rules, officials said.

A proposal in this regard will be discussed by SEBI’s board later this month, the officials added. The proposed 'regulatory sandbox' is intended to serve as a testing ground for new business models and technologies that benefit investors, Indian markets and the economy at large.

Under this framework, the eligible entities would be granted certain facilities and flexibilities to experiment with fintech solutions in a live environment and on real customers, while ensuring that there are necessary safeguards for investor protection and risk mitigation.

While the Indian capital market participants have been early adopters of technology, the SEBI is of the view that adoption and usage of emerging financial technology can be a key instrument to further develop and maintain an efficient, fair and transparent ecosystem.

With this aim, SEBI had set up a committee on financial and regulatory technologies under the chairmanship of TV Mohandas Pai with expert members from the startup industry, fintech community and academicians.

Based on their recommendations, SEBI had last year stipulated a framework for an industry-wide innovation sandbox, under which fintech startups and entities not regulated by SEBI have access to market related data, particularly trading and holding data in an anonymised form to help them test their innovations effectively before their introduction in a life environment.

The committee had also recommended that SEBI may set up a regulatory sandbox to provide a live testing environment where new solutions can be deployed on a limited set of eligible customers for a specified period of time with certain relaxations.

SEBI had subsequently floated a public consultation paper and after taking into account all the comments, it has now finalised a draft set of norms for allowing the regulatory sandbox. Under the proposed framework, all entities registered with SEBI would be eligible for testing within the regulatory sandbox on its own or use the services of a fintech firm.

In subsequent phases depending on the response received, SEBI may consider permitting fintech startups, fintech firms and other entities that are not regulated by it. While SEBI grants registrations for a particular activity, it is considering cross-domain approach for this regulatory sandbox wherein a regulated entity can be permitted to test solutions for activities for which it might not be registered. For this, limited certificates of registration can be granted.

The requirements for which no relaxation would be considered include confidentiality of customer information, fit and proper criteria particularly on honesty and integrity, handling of customers' funds and assets, rules for prevention of money laundering and countering the financing of terrorism, risk checks and Know Your Customer principles.

The requirements that merit relaxations include networth, track record, registration fees, financial soundness and guidelines relating to technology risk management and outsourcing. Any relaxation would be available for a maximum period of one year.