Malta: MFSA Issues Consultation Document On The Setting Up Of A Regulatory Sandbox

Last Updated: 19 July 2019
Article by DF Advocates

The Malta Financial Services Authority ('MFSA'), has, on the 4th July 2019 published a consultation document proposing the setting up of a regulatory sandbox ('Sandbox'), aimed at encouraging FinTech innovation ('Consultation Document').

This document is a move by the regulator in recognising that technology is not simply changing and enhancing the dynamics of the financial industry, but, also the way in which the financial authorities implement and enforce regulations. As such, existing regulatory frameworks may not fully cater for such innovations. Through the proposed Sandbox, start-ups and established entities alike will have the opportunity to test the commercial and regulatory viability of their innovations. This will be conducted in a fully functioning financial services environment, operating under a set of conditions and limitations, in order to strictly contain any inherent risks.

The MFSA is proposing that the Sandbox may be structured in either a bi-annual cohort or a special purpose cohort. The former will revolve around the acceptance of a group of applicants for a period of six months. Diversely, the latter would cater for specific solutions or challenges proposed by the MFSA or depending on industry feedback. Such chosen applicants will run concurrently but independently of the cohorts running bi-annually in the Sandbox, for a specifically set period, in accordance to the solution as presented by the MFSA.

A sandbox lifecycle consisting in a six-stage process, applicable to both cohorts mentioned above is also being proposed, being:

Stage 1 – Proposal Stage

The MFSA will issue a call for interest to the industry, during which interested participants ('Applicants') would need to submit their proposal to the MFSA, through a specific sandbox proposal form, open for a two-month period, with a non-refundable proposal fee of Euro 200.

Stage 2 – Selection Stage

The proposals will be ranked in accordance to the eligibility criteria and subsequently presented for selection to the sandbox selection board.  The proposed sandbox eligibility criteria, being innovation, genuine need for testing, readiness of the Applicant and consumer benefit, ensures that only proposals which truly merit the use of the Sandbox are to be selected.

Stage 3 – Application Stage

The selected Applicants are requested to submit their application and application fee to the MFSA within two months of the MFSA's acceptance. Such application will be used by the MFSA to perform its method of assessment of 'fit and proper' persons. Following such assessment, the MFSA would either grant a provisional authorisation together with the sandbox licence ('Licence') or refuse authorisation. If authorisation is granted, the participants will be allowed to start testing their proposals in the Sandbox for a six-month period, to which an extension may be given, depending on certain conditions. Although, if the application is refused, the Applicant will be refunded half the application fee, but would still be eligible to apply again for future cohorts.

The MFSA envisages Applicants to fall within one of these categories:

  1. Authorised persons testing proposals which are covered by their existing authorisation, only requiring a Licence;
  2. Authorised persons testing proposals which are not covered by their existing authorisation but falling within scope of existing legislation, requiring a Licence and a provisional authorisation to cover the proposal as an extension of their existing authorisation;
  3. Unauthorised persons testing proposals falling within scope of existing legislation require a Licence, authorisation and partnering with an authorised person); or
  4. Un/authorised persons testing proposals falling outside scope of existing legislation.

Participation within the Sandbox shall be subject to certain conditions, which shall be identified either under the provisional authorisation to provide the service and/or to perform the activity within the Sandbox. Participants will also have to disclose to prospective clients that they are operating under a Licence and the respective risks pertaining to the innovation underlying the product/service offering and the compensation structure should clients suffer any loss or damages. In order to enhance consumer protection, it is being proposed that Participants operating solely under a Licence will be obliged to contribute to a compensation arrangement for potential losses suffered by their respective consumers through either the setting up of a consumer protection fund, guarantees, or internal arrangements.

Stage 4 – Sandbox Testing Stage

All Sandbox participants will be expected to dialogue with the MFSA, through frequent reporting and semi-monthly meetings. Additional to the individual guidance, the MFSA will have other regulatory tools at its disposal, namely regulatory and supervisory toolkits, waivers and issuance of no enforcement action letters to entice more financial services companies to test out new products without fear of enforcement.

Stage 5 – Sandbox Testing & Evaluation Stage

Participants will be required to provide a detailed report of the outcome of the respective tests outlined within their Licence and what they intend to do following their Sandbox period.

Stage 6 – Sandbox Exit Stage

The participant will initiate its transition outside the Sandbox, which may occur in four ways depending on the test outcomes of the Licence:

  1. Discontinuation of the financial innovation through the revocation of the provisional authorisation and expiration of the Licence;
  2. Extension for continuation inside the Sandbox through an extension of the Licence;
  3. Continuation outside the Sandbox with certain restrictions through the granting of the applicable authorisation with certain post-licensing conditions while the Licence can expire; or
  4. Continuation outside the Sandbox without restrictions through the granting of the applicable authorisation while the Licence can expire.

The MFSA, has further intention to collaborate and build international relations with jurisdictions that have already set up a Sandbox, creating FinTech Bridges, allowing knowledge sharing and opportunities to connect.

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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