During these past few years, the financial services industry has seen major technological changes. The term FinTech is used to describe the use of innovative technology to deliver financial services to customers. Various jurisdictions are striving to implement proactive FinTech measures in order to encourage new investment and opportunities.
To this end, the Malta Financial Services Authority (‘MFSA’) has published a Consultation Document. This document focuses on the first pillar of its FinTech Strategy which centres on the regulatory ecosystem. The proposed regulations are aimed at adopting regulatory and supervisory initiatives to support innovation and increase regulatory efficiency. To this end, the MFSA is seeking feedback on this Consultation Document from the relevant stakeholders.
The main proposals falling under this document relate to the MFSA Regulatory Sandbox as well as Regulatory Technologies (RegTech) and Supervisory Technologies (SupTech).
The MFSA Regulatory Sandbox
The term ‘Regulatory Sandbox’ is widely used in the FinTech industry to describe a closed testing ground for new business models. The MFSA intends to issue a Regulatory Sandbox aimed at giving participants the opportunity to test the feasibility of their innovations from a commercial and regulatory perspective. This will be framed within a specific period in a fully functional financial services environment, under certain conditions and limitations. These conditions are meant to contain any associated risks to consumers as well as the financial system.
The Sandbox Lifecycle will be made up of six stages which have specific times allocated to them.
- In the Proposal Stage, the MFSA will issue an expression of interest, which will be open for a duration of two monthss. During this time, applicants will need to submit their proposal through a specific Sandbox Proposal Form.
- During the Selection Stage, the submitted proposals will be ranked in terms of eligibility based on the information provided by the applicant. Anyone applying to participate in the Sandbox will need to meet certain mandatory eligibility criteria. This is meant to guarantee that only proposals which warrant the use of the Sandbox are permitted. The proposed eligibility criteria are innovation, the need for testing, readiness of the applicant and consumer benefit. The Sandbox Selection Board will then select a restricted number of proposals from those eligible.
- In the Application Stage, the MFSA will ask the selected applicants to apply. The data in the application form will be used to perform a fit and proper assessment. Thiswill require specific information to be provided by the applicant. Following such assessment, the MFSA will grant provisional authorisation together with a Sandbox Licence or else refuse authorisation.
- Throughout the Sandbox Testing Stage, the participant may carry out the tests as specified in the Sandbox Licence. All participants are required to issue reports and hold frequent meetings with the MFSA. This stage will last for four months.
- During the Sandbox Testing and Evaluation Stage, participants will continue delivering their service. Concurrently, they also need to provide a detailed report on the innovation’s outcomes and its future following the Sandbox period.
- Finally, in the Sandbox Exit Stage, the future of the participant’s service will be determined. Depending on the test outcomes of the Sandbox Licence, the participant will start the transition outside the Sandbox. This process can result in a number of outcomes. The financial innovation can be continued either inside or outside the Sandbox. It can also be discontinued through the revocation of the provisional authorisation and the expiration of the Sandbox Licence.
RegTech and SupTech
The MFSA plans to implement RegTech solutions meant to help entities adhere to their regulatory obligations in a more effective way. Consequently, the MFSA wants to explore ideas of how it can support RegTech and wishes to set up a framework to certify such innovative solutions.
SupTech, on the other hand, will automate certain procedures and make the MFSA’s supervision of its licence holders more efficient. The MFSA wishes to reap the benefits of this technology in order to help it investigate and detect any abuses.
The Way Forward
A Regulatory Sandbox is an attractive option for both established firms as well as start-ups to test their products. It has the potential to foster sustainable financial innovation and reduce regulatory ambiguities. The long-term future of this Sandbox will be determined after the MFSA gathers all industry feedback. The MFSA will then publish its detailed proposals on the implementation of the Sandbox and the other regulatory initiatives. This is all part of an effort which aims to make Malta an international FinTech centre. By adopting a FinTech Strategy, financial services providers can be leaders in innovation by merging technology with their products and services.