The Capital Markets Authority (“CMA”) of Kenya has formulated draft guidelines for a regulatory sandbox to test innovations in the area of fintech. A regulatory sandbox is a controlled environment within which new innovations which are non-viable under current regulations are tested under the supervision of a regulatory authority. A regulatory sandbox is intended to help the regulator to understand the challenges of emerging technologies in order to come up with better regulations which are friendly to investors, consumers and innovators.
The ideal outcome from the sandbox is that the regulator shall formulate regulations in the areas which are lacking in regulation and the participant will be able to launch in the market, subject to any conditions imposed by the regulator. It is also advantageous to consumers because it minimizes the risks associated with use of unregulated technology.
The regulatory sandbox has been practiced in other markets such as the United Kingdom, Australia, Canada, Rwanda, UAE and Singapore. In the United Kingdom, the Financial Conduct Authority (the regulator for the financial industry), has already hosted more than seventy (70) rms in four cycles of the regulatory sandbox and it is preparing to host the fifth cycle.
The draft guidelines from the CMA provide that an applicant to the regulatory sandbox must be a company incorporated in Kenya or any other East African state or a company admitted to a similar regulated environment hosted by any regulatory authority with whom the CMA has established terms of cooperation. An applicant shall also be required to have an innovative product which it intends to offer following a successful exit from the sandbox.
Among the information that an applicant will be required to provide is:
1.Curriculum Vitaes of all founders and key management personnel;
2.Potential benefits of the proposed product, solution or service for capital markets deepening in Kenya;
3.Evidence that the product is sufficiently mature to be tested in a live environment;
4.A projected plan and clear strategy for exiting the sandbox; and
5.Proposed safeguards for avoiding potential harm to investors or the capital markets.
An applicant will also be required to submit a test plan to the CMA detailing the key test objectives, the testing metrics, the testing methodologies, the testing period, and the reporting requirements.
The Guidelines propose that the initial testing period shall not exceed twelve (12) months and where extended testing is necessary, the period can be extended for another twelve (12) months.
The participants will be required to keep records and report to the CMA on key performance indicators, key milestones, statistical information, key issues arising and the measures taken by the participant to address those issues.
The participants will then be required to submit a final report to CMA within thirty (30) days of the end of the testing period.
After the testing period, CMA may either grant the participant a license to operate in Kenya subject to existing laws and regulations, or deny the participant permission to operate in Kenya. The CMA may also adopt new regulations or guidelines based on the lessons learnt from the sandbox.