Bank Negara Malaysia Sandbox: Is it for you?

Bank Negara Malaysia (“BNM”) in October 2016 issued the FinTech Regulatory Sandbox Framework (“FRSF”) in response to the rapid development in financial technology innovations. This has sparked interest among stakeholders, particularly standalone Fintech companies, existing licensed financial institutions, consumers as well as technology providers to be involved in this key and exciting development.

As a regulatory compliance consultant, our involvement includes providing input, comments and ideas for consideration of various regulatory agencies within the ASEAN region and sharing knowledge with as many aspiring interested parties.

This article is our attempt to provide a concise overview of the relevant approaches to capitalize on the FRSF. Views and opinions in this article are that of the author and not BNM.

1. What is BNM’s Sandbox?

It is a structured approach by BNM in considering various types of new financial technology innovation and its implications on various stakeholders, whether it is to be introduced by an existing financial institution or a standalone FinTech company or collaboration of both (collectively known as “Applicant“).

The Sandbox allows BNM to introduce new financial technology in a controlled live market environment with specific parameters, addressing specific consumer needs, and with specific deliverable and timelines. The structured approach provides stakeholders opportunities to identify regulatory requirements or procedures that may unintentionally inhibit innovation or render non-viable, evaluate the adequacy of Applicant’s safeguards in managing risks and mechanism to contain the consequences of failure. BNM is clear that the Sandbox cannot be used to circumvent any of the existing laws and regulations under its administration.

BNM welcomes applications from all over the world, for almost all types of innovation and provides a maximum of the 12-months period for testing under the FRSF.

2. Are you a suitable Applicant?

First, an Applicant needs to be certain that its proposed FinTech innovation and service value-chain does not fit into any of the existing laws and regulations administered by BNM. The proposal that partially fit into existing laws and regulations but with clear benefits to specific stakeholders (e.g. better experience for under-banked and unbanked consumers, increase financial safeguard for retail consumers) may be considered by BNM. In order to be prepared, the Applicant needs a thorough comprehension of the relevant laws and regulations administered by BNM.

Second, only proven innovation will be considered by BNM i.e. working and/or proven technology-based innovation or capable to be proven to function within a live environment for a specific target market, business model and value-add in Malaysia. BNM is unlikely to consider Applicant with a mere idea or at the research stage, regardless of its potential, as the former deemed it premature and likely to fail.

Third, the FinTech Company is already operating as a business and/or working together in partnership with an existing financial institution in Malaysia or elsewhere.

Fourth, the proven innovation clearly benefits its proposed stakeholders, which among others, must include specific target market/consumer in Malaysia, has the ability to scale-up from Malaysia and beyond, and able to create high skill employment for local Malaysian.

3. Getting an Applicant to be ready 

The applicant needs to make comprehensive preparation, among others on the following –

  • Able to provide evidence about financial technology innovation;
  • Established appropriate framework and controls to manage risks associated with AML/CFT requirements, KYC/CDD processes, operational competency, technology and data security, regulatory compliance, financial fraud and consumer protection;
  • Ensure that shareholders and key management are fit and proper, and appropriately competent; and
  • The business plan and financial projection are feasible.

All of these aspects need to be comprehensive and consistent prior, during and post the sandbox testing period by each Applicant.

BNM’s main role is to evaluate all applications submitted to them and they will neither guide nor advice Applicant on preparation for the FRSF application. BNM expects each Applicant to be thorough in their preparation and ability to provide convincing evidence to support their application.

4. Managing Expectations

Like in any other types of applications to BNM, the Applicant needs to manage their expectation and be realistic. In considering an application, BNM will be thorough and evaluate various aspects beyond the specified requirements. It is likely that BNM will consider certain types of FinTech innovations for now over the others as they also consider the financial industry circumstances and development, economic progress and local consumers’ readiness and expectations.

5. Would collaborate with financial institution more advantageous?

The FRSF states that BNM prefers collaboration between licensed financial institutions (i.e. banks – conventional and Islamic, companies licensed under the Money Services Business Act and prescribed institutions under the Development Financial Institutions Act) with FinTech companies.

By partnering with a licensed financial institution, it is likely that the preparation by the FinTech companies will be more robust, especially on concern related to financial adequacy, corporate governance and comprehension about regulatory compliance requirements.

However, in our engagement with FinTech companies, they raised concerns about their ability to continuously be innovative, possible dilution of their independence and authority due to their smaller presence within the collaboration as well as potentially slower time-to-market.

6. Is it an experiment by BNM?

BNM does not see this as an experiment. In fact, the FRSF is a fresh new way by BNM to embrace technological advancement in the financial industry and it is an opportunity for stand-alone FinTech companies to be authorized to offer their services, especially to the under-banked and unbanked. This is in-line with BNM’s aspiration to enhance financial inclusion by empowering consumers via democratization of financial services.

Having stated the above, the applicant needs to be realistic that BNM is not considering all types of innovation concurrently. Some types of innovation will be considered sooner rather than later, largely depending on the local financial industry development, Malaysia’s economic progress and consumers’ expectations.

7. What will happen after the Sandbox testing period?

Successful Applicants of the FRSF may be allowed to continue after the sandbox period (a maximum of 12-months) without being asked to apply for any specific licenses under the existing regulatory requirements.

However, the final outcome relies heavily on the impact of each Applicant, the effectiveness of its related control mechanism, quality of Sandbox test results and consequences (intended and unintended) throughout the sandbox period, as well as value-add of the technology innovation in the medium and long run to various stakeholders. We noticed BNM has outlined its expectations through the FRSF – and this has given FinTech companies crucial lead on the expected deliverables and certain level of confidence to their investors as well.

In conclusion, aspiring Applicant needs to understand their plan for Malaysia market and undertake systematic and comprehensive preparation prior to making an official submission to BNM. It is not just about providing the required information and completing the prescribed form provided by the FRSF to the regulator, but it requires wisdom with the multi-faceted thought process and expert review to heighten the success rate of their application.

Copyright of @ 31 Jan 2017.

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