Elucidating Regulatory Sandbox: With Special Emphasis On Irdai`S Framework

According to RBI, A regulatory sandbox (RS) usually refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may (or may not) permit certain regulatory relaxations for the limited purpose of the testing. (1) The term sandbox originally refers to a small box filled with sand where children play and experiment in a controlled environment but in the financial industry, the term “sandbox” refers to a mechanism for developing regulations that deal with the changing innovation.

The most unique feature of a regulatory sandbox framework is that it functions in a "live" environment wherein all the innovative product`s processes, services, and business models can be deployed on a limited set of real customers for a specified period of time with certain relaxations in rules and guidelines. It is used to mimic the characteristics exhibited by the production environment on a real-time basis.

The concept of “learning by doing” is put into practical aspects under this and the product’s viability is tested without the need for an expensive exposure. Novel financial products, technologies, and business models can be tested under a set of rules, supervision requirements, and appropriate safeguards. (2)

It helps in analyzing the benefits and risks of new financial innovations. They are a key development to increase efficiency and bringing up new opportunities for people, the innovators as well as the consumers. The two key objectives of such a framework include investor protection and risk mitigation. It reduces the cost of innovation along with reducing the barriers to entry.

A successful test may result in several outcomes such as full-fledged or tailored authorization of the innovation and changes in regulation. The first regulatory sandbox was launched in 2015 in the U.K and gained popularity all over the world. (3) At the beginning of 2018, there were more than 20 jurisdictions actively implementing or exploring the concept. (4)

In addition to this, regulatory sandboxes also open space for improvements in financial inclusion through innovations and such success of financial inclusion largely hinges on the capacity of the financial sector to innovate. Innovation can address traditional barriers to financial inclusion such as legal and regulatory measures. Various innovative ideas like biometric ID, alternative credit scoring, e-KYC will start to come into the picture with the advent of such frameworks.

IRDAI`S REGULATORY SANDBOX FRAMEWORK

IRDAI (Insurance Regulatory and Development Authority of India), the insurance regulator in the country has three-fold functions, i.e. protecting interests of consumers, developing insurance industry and monitoring insurance-related activities.

It brought the regulatory sandbox framework to allow experiments to test the viability and acceptability of novel products. It provides the consumers as well as the regulators with a single point contact for its regulatory sandbox (RS) initiative, wherein FinTech companies or firms can seek permission to experiment with innovative strategies for the growth of the respective sector. It has already invited applications for the RS from September 15 to October 14, 2019. Although, the framework has come up with a warning that no relaxation would be offered in respect of compliance with the Insurance Act, 1938, the IRDA Act, 1999 or any other applicable statutory provisions.

The IRDAI (Regulatory Sandbox) Regulations, 2019 was notified and some of the significant features of the guidelines prescribed under the framework include:

● Objective: The objective to formulate such a framework is to develop the insurance sector, protect interests of policyholders and relax regulatory provisions by creating a regulatory sandbox environment.

● Applicant: The applicant as per the regulations includes an insurer or an intermediary or any person other than an individual having a net worth of ten lakh rupees for the previous financial year or any other person recognized by the Authority.

● Categories for Application: The regulations claim to support innovation in insurance under the heads of innovation support and distribution, insurance products, underwriting, policy and claims servicing or any other category recognized by the Authority.

● Other formalities: Application must be sent electronically in a specified form with a non-refundable fee of ten thousand rupees. The Chairperson, on being satisfied may permit the application for 6 months and revoke the permission on certain conditions. The Authority can review the progress through a single point of contact (SPOC).

● Extension of the Proposal: The applicant can be granted a maximum extension of 6 months by the Chairperson on the request through an application. The maximum period for relaxation of regulatory provisions is one year.

● Conclusion of the Proposal: Applicant has to submit a report within 15 days of completion of the time period of proposal showing the fulfillment of objectives, feedback from policyholders and a plan of action to bring the proposal under the existing regulatory framework.

CONCLUSION

Regulatory Sandbox provides an opportunity to conduct field tests and analyze the pros and cons of the new financial innovation. Such a framework supports the regulator, innovators, financial service providers, and customers. IRDAI has brought a single point contact for the sandbox initiative to provide opportunities in the growth of the specific sector.

A regulatory sandbox framework allows to usher innovations in various sectors and help to provide a good balance of regulatory flex and control. Also, a globally integrated sandbox will enable collaborative cases and quicker integration of learning.

[Madri Chandak, a student of Hidayatullah National Law University is in her second year and has a keen interest in the economic and commercial aspects of the law.]

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1. Department of Banking Regulation, Draft enabling framework for Regulatory Sandbox, RBI, 2 (Apr. 4, 2020), https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/EFRARESADC108A0A98E146479C6D39D36EA5A76A.PDF
2. UNSGSA Fintech Sub-Group, Briefing on Regulatory Sandboxes, UNSGSA, 2 (Apr. 4, 2020), https://www.unsgsa.org/files/1915/3141/8033/Sandbox.pdf
3. Mike Faden, Regulatory Sandboxes Provide "safe spaces" for Fintech Payment Services Innovation, American Express, (Apr. 4, 2020, 09:54 AM), https://www.americanexpress.com/us/foreign-exchange/articles/regulatory-sandboxes-for-innovative-payment-solutions/
4. Ibid at 2.