On 15 April 2023, the National Bank of Ukraine (NBU) launched a regulatory sandbox, an initiative aimed at promoting innovation and growth in the financial sector. This regime will enable financial and payment service providers to test their innovative products, services, or technologies in a controlled environment under the supervision of the NBU.
Eligible participants
The sandbox is open to authorised financial service or payment service providers. Unauthorised entities will not have access to the sandbox at this stage.
Eligible products
A product or service to be tested in the sandbox must meet the following criteria, which may be expanded by the NBU:
- it must be unique (i.e., there should not be an equivalent product or service already in the Ukrainian market) or possess substantially superior or improved features;
- it must not violate the Ukrainian antitrust rules;
- it must not be prohibited by Ukrainian laws or otherwise specifically restricted.
Application process
The process of application to participate in the sandbox consists of several stages:
Initial assessment (up to 10 business days)
The applicant is required to submit an application containing general information about the applicant itself, as well as information on the product or service to be tested (general description, innovative features, potential for market demand, risk analysis and proposed mitigations, test scenarios, etc.). Upon receiving the application, the NBU will conduct an initial assessment to ensure that the application is complete and meets the eligibility criteria.
Detailed assessment (up to two months with a possible extension for another two months)
If the application passes the initial assessment, the NBU will proceed to a detailed assessment, during which it will evaluate the proposed innovation and review the testing plan, risk assessment, and risk management measures.
The applicant will be required to submit more detailed information on the proposed product or service, such as criteria for evaluating the results of the testing, strategies for existing the sandbox and plans for post-testing development of the product or service, information on available IT systems, quality control measures, need for attracting customers' funds during testing, available financial resources to cover the testing costs and costs of the guarantee of performance of obligations towards customers. The applicant may also request regulatory exemptions (accompanied by the reasoning) necessary for the proper operation of the product or service under the sandbox regime.
The NBU will also determine and agree with the applicant on the testing regime and procedure for the product that would create the framework for launching it in the sandbox and be reflected in the testing agreement.
Decision on the application
Following the completion of the detailed assessment, the NBU will decide on the feasibility of the application. If the decision is positive, the NBU and the applicant will proceed to negotiate and sign a testing agreement.
Testing agreement
The testing agreement outlines the terms and conditions of the testing, including the testing period, reporting requirements, and risk management measures.
Publication of information
Once the testing agreement is signed, the NBU will publish the information about the sandbox participant on the NBU's official website or make the relevant record with the Payment Infrastructure Registry (if the proposed product or service relates to the payment services market).
Participation in the sandbox
Participants will have a testing period of up to 12 months, with the possibility of an extension for another 12 months.
The framework for operating in the sandbox would be determined and negotiated between the NBU and the applicant during the detailed assessment stage and set out in the testing agreement. The testing framework will include the following elements:
- special regime of operation: adjustment (simplification) or waiver by the NBU of specific requirements and associated penalties or other sanctions for regulatory non-compliance, which would otherwise be applicable to the product or service;
- adaptive requirements to participants: based on the specific characteristics and risks associated with the product or service, the NBU may impose requirements relating to information security, uninterrupted operation, reporting and accounting systems, disclosure and guarantee of performance of obligations towards customers;
- quotas relating to the product or service: limits on the number of customers, number or amount of transactions, geographical restrictions, restrictions on commitments towards customers, restrictions on the number of payment instruments that may be issued, etc.
The participant may request modifications to the testing regime and procedure, which may be approved by the NBU if justified.
Relations with customers
Agreements with customers will need to include certain provisions that address the specifics of the sandbox environment and ensure transparency, protection of customers' interests, and compliance with the regulations, such as:
- disclosure about the sandbox testing of the product or service, applicable restrictions during the testing phase, duration, and conditions for early withdrawal of the product or service;
- disclosure of potential risks and their consequences for the customer;
- quality control measures;
- procedure for using the guarantee of performance of obligations towards customers.
Sandbox participants may charge fees or pay rewards to customers for the use of the product or service during the testing phase if such fees or rewards are specified in the testing agreement with the NBU.
Monitoring and control by the NBU
The testing agreement will provide for the terms and procedure of the NBU's control of compliance by the sandbox participant with the requirements of the testing agreement and other applicable rules.
The NBU will also conduct broader monitoring of the participant's activities with the aim of assessing the effect of the product or service on the financial or payment services markets. The monitoring will be based on the regular reporting by the participant, analysis of documentation, transactions, questionnaires and other information that may be requested from the participant, as well as information generated by the NBU and received from the other state authorities or official sources.
Based on this information, the NBU may demand the participant to suspend the product or service or terminate its participation in the sandbox entirely (if the participant fails to comply with the NBU's requests or demands).
Termination of participation and final results report
Participation in the regulatory sandbox will terminate at the completion of the testing period provided for in the testing agreement. Participation in the sandbox may be terminated earlier if the participant decides to exit the sandbox or based on the NBU's decision in case of non-compliance by the participant with the testing agreement or the NBU's requirements.
In case of scheduled termination, the participant is required to submit a final report on the testing results to the NBU within ten business days. The report should contain the following information:
- present the results achieved during the testing, in accordance with the evaluation criteria defined in the testing agreement, as well as summarised conclusions on the testing process;
- describe any issues or challenges encountered during the testing, including information about identified risks and measures applied to manage them;
- assess the customer demand for the product or service;
- provide information about any customers' complaints;
- if applicable, report on any losses suffered by customers.
The NBU will evaluate the product or service based on the results of the testing in the sandbox and may provide recommendations on its further development. The NBU could also initiate amendments to the applicable regulations to facilitate the further operation of the product or service. The testing results will also be published on the NBU's official website in the form agreed with the participant.
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.
