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SEBI AND RBI REGULATIONS ON THE FINTECH SANDBOX


In the growing era of technological advancements, there is a rising demand for newer products in the market worldwide. The main focus of the markets is to safeguard the interest of consumers. Due to this rising demand and technological advancements, market regulators globally are encouraging participants to bring innovative ideas, something out of the box, that not only helps to cater to the interest of customers but also contributes to the growth of the industry.

In the last few years, India has witnessed a series of innovations in the field of the financial sector, especially the growth of FinTech companies due to the increasing technological advents. The customers have also started adopting and funding these companies due to their increasing interest in FinTech. However, there are several challenges ahead involved in the regulation of these FinTech companies.

Therefore, in this article you’ll find answers to certain questions that are listed below:

  1. What are FinTech companies?

  2. What is meant by Regulatory Sandboxes (hereinafter, referred to as RS)?

  3. How these FinTech companies are regulated in India?

  4. What are the regulations imposed by RBI on these companies?

  5. What are the regulations imposed by SEBI on these companies?

  6. What are the differences between RS provision of RBI and SEBI?

  7. Comparing India with other countries in the field of RS for FinTech companies.


FINTECH COMPANIES


  • The acronym “FinTech” is used to denote financial technology.

  • FinTech companies are the companies that use technology to provide financial services to their customers such as retail payments, online transactions, cheque deposition from a smartphone, investment management, etc.

  • It refers to emerging technology that aims to enhance and simplify the distribution and use of financial services.

  • FinTech is aimed to help companies and their consumers, and business owners in managing their financial transactions and their processes by specialized and differentiated software as well as algorithms.

  • Some examples of FinTech companies are Paytm, Razor pay (a payment gateway for online transactions), Instamojo, etc.

  • The development of crypto-currencies and using them, for example, bitcoin, also comes under FinTech.

  • Due to the advent of technology, innovations in financial technology are taking place at a faster pace and as a result, funding of such companies is increasing. Therefore, there is a dire need to regulate them.

REGULATORY SANDBOX


  • In a literal sense, a sandbox is a box containing sand where children experiment and try to make something with the help of their innovating mind, and if they get successful in this skill then they might choose it as their passion in the long run.

  • Similarly, a Regulatory Sandbox (RS) is an ecosystem or framework created and regulated by an authority that provides an opportunity to market players for live testing their innovative products, business models, services, and delivery mechanisms (bounded with certain regulations).

  • The regulators of such an environment can be RBI, SEBI, IRDAI, etc. It is at their discretion to permit certain regulatory relaxations for the limited purpose of testing.

  • It can provide a structured avenue to develop innovation that facilitates the delivery of relevant, low-cost financial products.

  • This ecosystem allows the innovators to conduct field tests to collect evidence related to the benefits and risks involved in new financial innovations. It also includes the consumers, the regulators, and the financial service providers.

  • The RS involving test for innovation in the fintech sector is referred to as fintech sandbox.

  • The proposed financial services to be launched under the RS must include new or emerging technology or use of existing technology in an innovative way.

  • Though the term 'Regulatory Sandbox' was coined in the UK yet it was first created in the US.

REGULATION OF FINTECH COMPANIES IN INDIA


In India, there is no universal regulatory body for fintech companies. The regulatory body overseeing such companies will regulate certain individual entities depending on the product or service provided by the entity. Due to the growing popularity of fintech companies in India, the regulators proposed to make certain regulations for these companies. Till now, there are 3 regulatory bodies in India which have made regulations for fintech sandboxes and they are listed below:

  1. Reserve Bank of India (RBI)

  2. Securities Exchange Board of India (SEBI)

  3. Insurance Regulatory and Development Authority of India (IRDAI).

After having a basic understanding of these technical words, let’s move towards the regulations imposed by RBI and SEBI on fintech sandboxes.

RBI REGULATIONS ON THE FINTECH SANDBOX


The major number of fintech companies comes under the regulation of RBI such as payments, crypto-currencies, account aggregation, etc. Application (by entities to be a part of the RS), Selection (of the entities that meet all of the eligibility criteria), Testing and Evaluation (of the proposed innovation with real customers), and Exit are the four phases of the method (of the entity from the RS). Therefore, its RS guidelines are more comprehensive and they include:

  1. INNOVATIVE PRODUCTS/SERVICES

According to the guidelines of RBI, “innovative products/services” include the arena of marketplace lending, money transfer services, digital KYC, smart contracts, financial advisory services, wealth management services, cybersecurity products, and digital identification services.

It also includes "innovative technologies" like API services, mobile applications, data analytics, artificial intelligence, machine learning, and applications under blockchain technology.

EXCEPTION- It will not include startups involved in:-

  • Creation of credit registry;

  • credit information services;

  • cryptocurrency or crypto assets;

  • trading, investing, and settling in crypto assets;

  • initial coin offerings (ICOs);

  • chain marketing services; and

  • Any banned product or service by other regulators and the Indian government.

  1. TESTING PERIOD

The testing can be performed in different periods but should be completed within 6 months. This time-bound testing will help in generating evidence-based policies.

  1. RELAXATIONS

Firms joining the regulatory sandbox will be granted numerous exemptions like liquidity criteria, board composition, management experience, financial soundness, and business results, among other things.

  1. REQUIREMENTS

Entities accessing the sandbox must comply with:-

  • anti-money laundering

  • counter-terrorist financing requirements

  • consumer privacy and data security,