Following the launch of the Malta Financial Services Authority (‘MFSA’) FinTech Strategy which aims to establish Malta as an international FinTech hub, the authority issued in 2019 a Consultation Document (‘Consultation Document’) regarding Regulations, first of the strategy’s six pillars. The MFSA sought feedback from relevant stakeholders on the Consultation Document and, as a result, on 22 January 2020, the MFSA published a Consultation Feedback with respect to the Establishment of a New Regulatory Framework for FinTechs (‘Feedback Statement’).

One of the main proposals of the Consultation Document related to the setting up of a Regulatory Sandbox (‘Sandbox’) to foster FinTech innovation in a contained environment monitored by the MFSA. In the Feedback Statement the MFSA took the position of issuing a Draft Rule (‘Rule’). This Rule attempts to establish a Sandbox which would not require a standalone framework or any additional changes to the existing legislation.

The Rule

The below listed criteria would all need to be satisfied for the Applicant and its FinTech Solution (i.e. a specific utilisation of FinTech) (‘Solution’) to be eligible for participation in the Sandbox:

  1. Innovation - the Solution shall be a technology enabled innovation which offers something new to the financial services sector.
  2. Need - there must exist a genuine need to test the Solution within the Sandbox.
  3. Benefit – a benefit must be derived, directly or indirectly to the financial services sector and its consumer.
  4. Readiness – the Applicant (i.e. the person submitting to the MFSA a proposal for a Solution to be tested within the Sandbox) must show it has enough resources to operate for the duration of the sandbox and that the Solution functions already.

The Sandbox lifecycle will consist of six stages as presented in the figure above: proposal, selection, application, testing, evaluation and exit.

1. Proposal Stage

The Proposal Stage will be permanently open for Applicants to submit their proposal subject to a €500 non-refundable administrative fee. The MFSA will initially assess the proposal to see if it satisfies the eligibility criteria previously discussed in this paper, i.e. ‘Innovation’, ‘Need’, ‘Benefit and ‘Readiness’. Following this assessment, the MFSA, at its discretion, shall arrange a preliminary meeting with the Applicant to clarify any queries it might have.

2. Selection Stage

In the Selection Stage, the MFSA will come to a decision as to whether the Applicant may move to the next ‘Application Stage’ or not.

3. Application Stage

Only where the MFSA determines that the proposed Solution: (i) would not require a licence or authorization from the MFSA; or (ii) is an activity which the Applicant is already licensed or authorized by the MFSA to carry out, may such Applicant proceed to the next ‘Testing Stage’.

A fitness and properness assessment shall be carried out by the MFSA to ensure that the Applicant is able to satisfy, on an on-going basis, all the below criteria:

  • Competence;
  • Reputation;
  • Conflicts of Interest and Independence of Mind; and
  • Time Commitment

At Application Stage, the MFSA, may impose on the Applicant, any conditions it deem fit. Notwithstanding this, the MFSA is open to coming to a mutual agreement with the Applicant on the following matters:

  • a six (6) or twelve (12) month testing period;
  • testing objective/s and performance measure/s;
  • the Applicant’s exit strategy from the sandbox; and
  • disclosures.

A non-refundable fee must be paid to the MFSA upon submission of an Application. The Fee payable by an Applicant would be either €1500 or €2500. The latter fee would have to be paid when the proposed Solution involves an activity that may prima facie, qualify as a financial service, but at the same time cannot unequivocally be categorised under Maltese financial services legislation. If a proposed Solution’s activity clearly falls under Maltese financials services legislation, then the applicable fee would be in accordance with the sector-specific legislation regulating that activity.

Only where the MFSA determines that the proposed Solution: (i) would not require a licence or authorization from the MFSA; or (ii) is an activity which the Applicant is already licensed or authorized by the MFSA to carry out, may such Applicant proceed without undue delay to the next ‘Testing Stage’.

4. Testing Stage

In the Testing Stage, the Sandbox participant may test the proposed Solution in a manner which will enable the Sandbox participant to demonstrate compliance with the conditions imposed by the MFSA.

Once the testing period is concluded or terminated early by the Participant or MFSA, the Sandbox participant must move to the next Evaluation Stage.

5. Evaluation Stage

During the Evaluation Stage, the Participant shall submit to the MFSA a report detailing: the performance of its Solution based on the testing objective/s and performance measure/s; and either (i) its intended strategy to exit the sandbox; or (ii) a request to continue operating within the sandbox. Following this submission, the MFSA, at its own discretion, will decide whether the Participant shall: (i) implement its exit strategy; or (ii) have the Testing Stage for it’s Solution extended for a further six (6) or twelve (12) months.

6. Exit Stage

The Participant, in accordance with the conditions set by the MFSA in the Evaluation Stage, will either: (i) implement its exit strategy without undue delay; or (ii) continue to operate within the Sandbox.