Singapore has a strong track-record of courting technological innovation and the people and businesses who create it. Having recently celebrated its 51st year of independence, Singapore continues its march towards becoming the world's first Smart Nation by fully harnessing the benefits of technology to create new opportunities for businesses and consumers, and enhancing Singapore's reputation as a global financial hub and innovation centre.
Key to achieving this vision is the creation of a conducive regulatory environment for nurturing the growth of financial technology ("FinTech") firms and a fast-evolving, sophisticated FinTech ecosystem in Singapore. The Monetary Authority of Singapore ("MAS"), Singapore's financial regulator and Central Bank, released a consultation paper on the proposed guidelines for a "regulatory sandbox" that will enable financial and non-financial institutions to experiment and develop new FinTech solutions in a safe environment (the "Regulatory Sandbox"). Actual regulation will only commence when FinTech companies grow to a size that could pose risks to consumers and the wider financial system. This article provides more details on the Regulatory Sandbox, as well as other recent FinTech developments in Singapore.
Current Regulatory Framework vs. Regulatory Sandbox
Current FinTech regulations largely reflect existing FinTech products and services available in the market. Financial institutions are free to launch new technology solutions without consent of the MAS, provided they have conducted their own due diligence on such products and all legal and regulatory requirements have been complied with.
This framework leads to two potential issues. First, where a FinTech innovator has an idea for a new product or service, it may not fit neatly into the current regulatory framework, and the innovator may be uncertain as to whether the product or service complies with existing regulations but reluctant to approach the MAS for guidance to avoid regulatory scrutiny and potential costly compliance actions. This uncertainty could stifle the creation of new products or services.
Second, it may be clear that a new FinTech product or service does not comply with the letter of current MAS regulations written to address concerns around prior or existing products or services, but these regulations may not be appropriate for the new product or service.
The MAS aims to address these issues by creating a platform for engagement and a compromise space between the MAS and innovators, where original solutions can be tested against relaxed regulatory rules that are defined on a case-by-case basis. The MAS can relax regulations in the Regulatory Sandbox because it can also set limitations on the innovations in the Regulatory Sandbox (for example, how many customers the product can be tested with, and the duration for testing the solution) thereby limiting the potential exposure if a solution in the Regulatory Sandbox fails.
Rules for Playing in the Sandbox
The Regulatory Sandbox is not yet live, but the MAS is taking substantive steps towards its creation. Public consultation on the Regulatory Sandbox closed on 8 July 2016, and the final guidelines are expected from the MAS in the coming months (the "Sandbox Guidelines").
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The draft Sandbox Guidelines explain some of the key points of how the MAS expects the Regulatory Sandbox to operate:
1. No single sandbox the MAS envisages each Regulatory Sandbox to be individually tailored to the proposed innovation in question. There will not be one single Regulatory Sandbox with a general set of relaxed rules, but rather the rules to be relaxed are dependent on the specific solution proposed.
2. Limits on regulatory relaxation notwithstanding the case-by-case approach, some regulations are perceived as fundamental by the MAS, and it is less likely that these will be relaxed. For example, some of these key regulations are in the areas of anti-money laundering and customer data confidentiality.
3. Exit limited duration will be a crucial feature of the Regulatory Sandbox. The MAS has made it clear that the Regulatory Sandbox should not be used as a way of getting around current regulations. If an innovator wishes to extend the duration of the Regulatory Sandbox agreed by the MAS, it must provide advance notice and compelling reasons.
The Sandbox Guidelines also set out criteria by which proposals to enter the Regulatory Sandbox will be judged. The Regulatory Sandbox will be most appropriate where the proposed solution is technologically innovative and brings significant benefit to consumers, and the Regulatory Sandbox applicant has the intention and ability to deploy the solution in Singapore on a broader scale after leaving the Regulatory Sandbox.
Regulatory Sandbox proposals should also include clear boundary conditions (such as limits on number of customers or transaction size) limiting the risk of the proposed solution, and a clear exit and transition strategy for leaving the Regulatory Sandbox and scaling up the solution. The following diagram sets out an overview of the MAS' Regulatory Sandbox application and approval process, and the estimated time frame upon receiving the proposal:
Source: http://www.mas.gov.sg/~/media/MAS/News%20and%20Publications/Consultation%20Papers/Consultation%20Paper%20on%20FinTech%20Regulatory%20 Sandbox%20Guidelines.pdf
For more information on the Regulatory Sandbox, please see the MAS' consultation paper here. Other FinTech Developments in Singapore The Regulatory Sandbox is big news for FinTech business in Singapore, but it's not the only news. Following the MAS' establishment of the Financial Technology and Innovation Group to promote the FinTech industry and committing S$225 million in investments into Singapore FinTech projects up to 2020, the FinTech Office was set up on 3 May 2016. The FinTech Office will act as a virtual one-stop coordinating body for FinTech stakeholders in Singapore, including the MAS and the Economic Development Board. The FinTech Office will no doubt have an important role to play in the managing of the new Regulatory Sandbox.
The UK and Singapore have also established a "FinTech Bridge" between the two countries, including the signing of a Regulatory Cooperation Agreement by the Financial Conduct Authority in the UK and the MAS on 11 May 2016. This agreement includes provisions on information sharing and a referral system whereby either authority can refer a FinTech business in its own jurisdiction to the regulator in the other. This referral system should be conducive to overseas expansion of FinTech businesses, as well as facilitating global understanding of market changes by regulators.
The MAS has also announced the availability of various grants and subsidies for FinTech companies looking to develop innovative solutions in Singapore. The MAS is also hosting the inaugural Singapore FinTech Festival in November that will bring the global financial and technology community together.
The proposed Regulatory Sandbox shows the extraordinary measures Singapore is taking to create a conducive and balanced environment for the development of innovative FinTech solutions and verifying a proposition in Singapore and wider markets, before being subject to future regulations. Whilst these are still early days, the Regulatory Sandbox will provide a welcome framework for Singapore's FinTech companies. The MAS's wider FinTech programmes, including the Regulatory Sandbox project, will contribute to Singapore's vision of becoming a smart financial centre, where new digital technology is used pervasively to stimulate competition and greater efficiencies within the finance industry.
By: Ally Smith and Justin Tong
EDITOR'S NOTE: We are excited to present this entry in our TMT2020 series, which reflects the key technology, media, and telecoms legal issues that are expected to impact today's organizations and tomorrow's marketplace. It also provides an opportunity to highlight contributions by TMT colleagues across our global offices and practice areas.