BNM Seeks Public Feedback on Two Key Enhancements to Its Regulatory Sandbox

BNM Seeks Public Feedback on Two Key Enhancements to Its Regulatory Sandbox

by March 29, 2023

Bank Negara Malaysia (BNM) is inviting feedback on its proposal to make several enhancements its existing Financial Technology Regulatory Sandbox Framework.

The central bank said that the enhancements are focused at ensuring proportionate regulatory facilitation and improving operational efficiency of the existing sandbox procedures.

BNM has received over 110 applications from both incumbents and startups over the six years that it has been in operations to enable the testing of new technologies such as electronic Know-Your-Customer as well as new business models including digital insurance, peer-to-peer family takaful, buy-now-pay-later, and digital remittance.

As a result of this, BNM had taken these developments into account when making several policy considerations or enhancements.

Additionally, the sandbox had also strengthened collaborative efforts between stakeholders in the fintech ecosystem by acting as a platform for active and open engagements with BNM.

Here are the two key enhancements in the sandbox exposure draft:

1.  Simplification of Eligibility Assessment

BNM is looking to simplify the existing stage 1 eligibility assessment criteria of the standard sandbox pathway.

The regulator found that the eligibility assessment may be challenging for early stage fintech startups based on engagements with sandbox applicants thus far. This has often led to challenges for applicants to secure necessary resources to support further development of their solutions.

With that in mind, BNM is proposing several enhancements to the eligibility assessment criteria:

  • Allowing for the value proposition of a new solution to be assessed by BNM at a conceptual level and validated during the testing period, as opposed to requiring upfront evidence on how it can address market gaps and inefficiencies (e.g. detailed market research, completion of a proof-of concept).
  • Providing greater room for applicants to develop and demonstrate their risk management capability. At the eligibility assessment stage, the priority from a risk management standpoint is to ensure an applicant demonstrates a fundamental ability to identify risks appropriately. Further scrutiny on the applicant’s comprehensive risk assessment and corresponding mitigation measures will instead be undertaken during the preparation stage (stage 2).

The draft proposes that the first stage of applications be determined by the following criteria; (1) identification of regulatory impediment, (2) value proposition, (3) business plan and state of readiness, (4) risk management and (5) fit-and-proper.

It is worth noting that the draft specifies that an applicant needs to be reasonably resourced to run a prototype within three months from the time of application. But an extension could be
granted on a case-by-case basis depending on the nature and complexity of the solution to be tested.

However, the central bank emphasised that this simplification should not be misconstrued as a loosening of safeguards or lowering of standards of entry to the sandbox.

Once an applicant is deemed eligible to participate in the sandbox, they will then proceed to the second stage known as the preparation stage where BNM will consider whether to approve the applicant to test a solution in the sandbox.

The flowchart below illustrates the application process to be followed in order to participate in the sandbox. Source: Financial Technology Regulatory Sandbox Framework Exposure Draft

2. Introduction of the Innovation Green Lane

The Green Lane is an alternative to the standard sandbox track. It aims to provide a simpler and quicker way for financial institutions to continuously test innovative solutions that face regulatory impediments.

According to the central bank, the Green Lane is expected to enable responsible financial institutions to innovate more freely where they can expect reduced compliance costs and faster time-to-market for carrying out market validation trials of new solutions.

BNM has laid out three key principal considerations guide the implementation of the Green Lane:

i. Accountability of financial institutions – Participating institutions approved for the Green Lane must be effective risk managers if it seeks to obtain flexibility to innovate faster with less regulatory impediments and compliance burden.
ii. Consumer-centric risk focus – A participating institution must prioritise and focus on addressing potential risks that may affect consumers to minimise potential harm and preserve consumer confidence in financial services.
iii. Risk-proportionate processes – Although the Green Lane is designed to be practical and to minimise operational complexity, sufficient safeguards must be in place to ensure accountability of participants, timely and effective responses to risks, while allowing BNM to intervene when necessary.

Overview of Innovation Green Lane’s operational mechanism Source: Financial Technology Regulatory Sandbox Framework Exposure Draft

The written feedback on the proposals in this exposure draft must be submitted by 30 May 2023.