Sebi proposes 'regulatory sandbox' framework for financial institutions

Sebi's discussion paper on 'regulatory sandbox' for fintechs reveals how companies can avail certain facilities and flexibilities to experiment with solutions in a live environment and on real customers.

Markets watchdog Sebi has proposed a 'regulatory sandbox' for financial institutions wherein exemptions could be provided from various regulations for developing new products and services.

By participating in the sandbox regime, companies will get an opportunity to test their solutions on real customers/investors. On the other hand, it may help Sebi to frame policies that may reduce the time and cost of deploying new investor-centric solutions in the capital market.

"Sebi plans to introduce a framework, to be called the 'regulatory sandbox'. Under this sandbox framework, financial institutions regulated by Sebi shall be granted certain facilities and flexibilities to experiment with fintech solutions in a live environment and on real customers," the regulator said in a discussion paper.

The regulator further said this discussion paper aimed to put forth key principles and the proposed approach for operationalising such 'regulatory sandbox.'

Last week, the regulator had proposed an innovative sandbox for fintech firms and entities not regulated by Sebi, which may use the environment for offline testing of their proposed solutions in isolation from the live market.

As per Sebi, the term 'regulatory sandbox' pertains to a live, testing environment where new products, processes, services, and business models can be deployed on a limited set of eligible customers for a specified period of time with certain relaxations in the extant Sebi regulations and guidelines.

How the sandbox will work

Regarding regulatory exemptions, Sebi said firms keen to participate in the sandbox were required to apply for relaxation of specific regulations that they felt were hampering their innovations or were acting as barriers to entry of new products.

Applicants must demonstrate eligibility to the satisfaction of Sebi by showing evidence of the various criteria laid down by the regulator.

The solutions or products would not be permitted to be tested in the regulatory sandbox if the applicant has no intention of deploying the fintech solution in India on a broader scale after exiting from the sandbox, the regulator said.

The applicant must also provide adequate disclosure of potential risks to users participating in the sandbox and seek prior confirmation from such users that they fully understand and accept the attendant risks.

Upon approval by Sebi to participate in the sandbox, the participant must submit interim reports on the progress of the test.

The duration of the sandbox testing stage is proposed to be a maximum of nine months with a maximum extension (upon request) of three months. After completion of testing, Sebi shall decide whether to permit the product, process, service, or solution to be introduced in the market on a wider scale.


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