India: Differences Between Regulatory Sandbox Provision Of IRDAI, SEBI And RBI

Last Updated: 20 August 2019
Article by Shubhangi Pathak and Priya Misra

Over the years, the emphasis of Indian market regulators has been towards increasing regulation of market participants, often primarily focussed on safeguarding the interests of customers. However, with the advent of technology and with the rise in demand for newer products, regulators across the globe are trying to encourage participants to think out of the box and create products which not only help the industry grow but also cater to the interests of the customers. The intention of the regulators, as widely understood is to balance growth and technological development with protection of the customers' interests.

What is Regulatory Sandbox?

A regulatory sandbox refers to an environment created by the relevant regulatory authority to provide market players with an opportunity to safely and securely execute and test their innovative products, services, business models and delivery mechanisms, in an orderly manner, which aims at protecting the customers and at the same time safeguarding the interest of the stakeholders.

Draft Guidelines issued for Indian Regulators

On 18th April 2019, the Reserve Bank of India (RBI) issued a "Draft enabling framework for Regulatory Sandbox 2019" (RBI Regulatory Sandbox) for public comments. The RBI Regulatory Sandbox aims to provide an environment to promote innovative technology for limited scale testing of a new product/service that may or may not involve some relaxation of a regulatory requirement. The RBI Regulatory Sandbox seeks to create a platform for testing the viability of the proposed product/service without need for a larger and more expensive roll-out by providing a structured and institutionalized environment for evidence based regulatory decision-making leading to better outcomes for the customers through an increased range of products and services, reduced costs and improved access to financial services.

Shortly after the issuance of the RBI Regulatory Sandbox, on 18th May 2019, the Insurance Regulatory and Development Authority of India (IRDAI) issued the "Draft Insurance Regulatory and Development Authority of India (Regulatory Sandbox) Regulations, 2019" (IRDAI Regulatory Sandbox). The objective of the IRDAI Regulatory Sandbox is to create a balance between the orderly development of the insurance sector on one hand and protection of interests of policyholders on the other, while at the same time facilitating technological innovation by way of relaxing provisions of any existing regulations framed by the IRDAI, for a limited scope and limited duration.

Subsequently, on 28th May 2019, the Securities and Exchange Board of India (SEBI) also issued a "Discussion paper on framework for Regulatory Sandbox 2019" (SEBI Regulatory Sandbox). The SEBI Regulatory Sandbox aims at a greater participation of investors, persons raising capital/providing services and an increased financial inclusion and penetration of financial products, especially in Tier II/III towns and cities. The SEBI Regulatory Sandbox also aims to ease the accessibility of retail investors resulting in greater convenience, reduced operational costs, lower fees and transaction charges, and at the same time paving a way forward for lower risk, more effective supervision and an increase in the efficiency and transparency.

Key Differences

The key differences between the RBI Regulatory Sandbox, IRDAI Regulatory Sandbox, and SEBI Regulatory Sandbox are as follows:

Point of Distinction RBI Regulatory Sandbox IRDAI Regulatory Sandbox SEBI Regulatory Sandbox
Categories of application The RBI Regulatory Sandbox is silent on the aspect of any categories under which an applicant may apply but if the proposed financial service is similar to a service which is already being offered in India, and unless the applicant can show that either a different technology is being gainfully applied or the same technology is being applied in a more efficient and effective manner, the proposed financial service shall not be eligible for testing.

An indicative list of innovative products/services and technologies under which an application can/cannot be considered is also provided.
An applicant may apply in one or more of the following categories:
  1. Insurance solicitation or distribution,
  2. Insurance products,
  3. Underwriting,
  4. Policy and claims servicing,
  5. Any other category recognised by the IRDAI.
The SEBI Regulatory Sandbox is silent on the aspect of any categories under which an applicant may apply but if the proposed financial service is similar to those that are already being offered in the markets, unless the applicant can demonstrate that either an innovative (efficient alternative) technology is being used; or the same technology is used more efficiently (process efficiency), the proposed financial the proposed financial service shall not be eligible for testing.
Applicants The entity applying should be a company incorporated and registered in India and shall meet the criteria of a start-up as per the Government of India, DIPP Notification No. G. S. R. 364(E) of 11th April 2018.

The company should also have a minimum net worth of Rs. 50 lakh as per the audited balance sheet
The entity applying can either be :

An insurer; or
  1. An intermediary or an insurance intermediary; or
  2. Any person other than an individual having a minimum net-worth of Rs10 lakhs for last one financial year;
  3. Any other person recognized by IRDAI seeking singly or jointly permission for promoting innovation in insurance in India
All the 'market participants' registered with SEBI can apply.
Waivers Applicants shall not be granted any 'legal waiver' and exemptions from the regulations governing customer privacy and data protection, secure storage of and access to payment data of stakeholders, security of transactions, Know-Your-Customer (KYC)/ Anti-money Laundering (AML)/Combating of Financing of Terrorism requirements and statutory restrictions. Applicants can be exempted from one or more Regulation(s) issued by IRDAI. However, no exemptions shall be granted with respect to the provisions of the Insurance Act 1938 and IRDAI Act 1999. Applicants shall not be granted any exemptions from the extant principles of Investor Protection Framework, KYC and AML.
Term of permission A general period of 6 months of permission is stipulated. A general period of 6 months of permission is stipulated. A general period of 9 months of permission is stipulated.

Key Similarities

The draft guidelines for the three regulatory sandboxes provide that once the testing process for a product/service is over, the applicants shall be required to submit the final report to the respective 'Chairperson' for the approval of the product or service. Per the norms stipulated by the three financial regulators, any exemption provided to a product or service, shall cease to exist once the sandbox stage of the product or service is over.

Conclusion

Although there seem to certain distinctions, the primary objective of all the three regulators appears to be the same ie, to pave the way for implementation of innovation and technology in their respective markets, by way of providing a safe and secure testing environment to the innovators and at the same time safe-guarding the customers interests. The guidelines for the three regulatory sandboxes are currently in draft stage, so it remains to be seen how the three frameworks will finally be implemented.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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