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SEBI revises sandbox rules

Chris Hamblin, Editor, London, 22 June 2021

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A so-called regulatory sandbox is a regime that a regulator sets up to allow FinTech (financial technology) startups and innovators at banks to conduct live experiments in a controlled environment under that regulator's supervision. The Securities and Exchange Board of India has just changed the rules for entry to its own scheme.

Sure enough, the objective of SEBI's regulatory sandbox is "to grant certain facilities and flexibilities to entities so  that they can experiment with FinTech solutions in a live environment and on a limited set of real users for a limited time-frame."

The revised guidelines state that all 'entities' (businesses) registered with SEBI under section 12 SEBI Act 1992 shall be eligible for testing in the regulatory sandbox. An entity may apply either on its own or in partnership with any other. In either instance, the registered market participant is to be treated as the principal applicant and is to be solely responsible for testing the software.

SEBI reserves for itself the right to approve the limited set of users as proposed by the applicant for testing in Stage I of the sandbox testing process. During Stage II, the applicant is allowed to test software out on a larger set of identified users with a maximum cap in operation, set by SEBI on a case-by-case  basis. These users will be asked for their positive consent, acknowledging the risks inherent in using the software in question.

In 2019 the World Bank conducted a survey of the 'facilitators' of regulatory innovation, including accelerators, sandboxes and innovation hubs. Nearly 85% of the regulators in its survey said that their motivation for setting up a sandbox or other innovative structure was to keep up with the markets and to learn about emerging innovations. Readers of Compliance Matters have long known this. Lesser motivations included a desire to attract more innovators into their jurisdictions and to promote competition between banks.

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