By Nilanjan Kumar, CSL Finance Ltd.
A regulatory sandbox mechanism refers to a legislation-based test bed through which the concerned government regulators test new products and services introduced by financial institutions and body corporates (hereinafter referred to as “Entities”) in a controlled environment to study their market feasibility. In this ‘controlled environment’ the regulators permit certain regulatory relaxations for the purpose of testing while simultaneously studying the potential risks associated with the innovation. This in turn allows the Entities a breathing space to launch their innovations.
Insurance Regulatory and Development Authority of India (hereinafter referred to as “IRDAI”) notified its sandbox regulations on 26th of July 2019 under the IRDAI (Regulatory Sandbox) Regulations 2019 (hereinafter referred to as “RS Regulation”) along with the Guidelines on operational issues pertaining to the Regulatory Sandbox (hereinafter referee to as “Guidelines to RS Regulation”) on 22nd August 2019. This was done pursuant to the recommendation of IRDAI’s Working Group in life and health insurance sector for refining the present legislation on the usage of telematics in motor insurance sector while preserving the information obtained by such innovation and understanding the privacy rights flowing therefrom.
The RS Regulation is a progressive piece of legislation. Under Guideline 6 of the Guidelines to RS Regulations, it is stated that the application by an entity would be deemed completed if their number of customers reach more than 10,000 and/or the sum total of premium collected exceeds 50 lakhs and/or any particular constraint by IRDAI is fulfilled. Within 15 days of the fulfilment of any of the aforementioned stipulation, the applicant would have to submit a report under Regulation 11 of RS Regulations. Furthermore, Regulation 10 of the RS Regulations, simplifies the process by appointing a single point of contact (hereinafter referred to as “SPOC”) entrusted to guide and provide advisory support to the applicants regarding such areas of legislation which would need some clarity. The SPOC also has to review the progress of the proposal by the applicants. Guideline 9 also provides for the migration of services where after two years of successful testing the applicant is given the option to offer such policies/services side by side and at par with any other services/policies offered by other entities under the existing laws. Lastly, Guideline 10 makes it the duty of the applicants to introduce a mechanism which not only maintains the confidentiality and prevents the misuse of the information collected during transactions, but also addresses the policyholders/consumers grievances. The said mechanism would be subject to periodic and continuous reviews.
This frameworks allow IRDAI to select a number of Entities through their broad-spectrum eligibility criteria and complete their five-stage testing process within a period of six months. An extension can also be sought by the service providers provided they do so a month before the completion of their original sandbox time period which should be accompanied with a proper justification. During the testing process, apart from the mandatory requirements such as KYC, the statutory requirements can be relaxed by the Reserve Bank of India depending on the circumstances of a particular Entity.
Being a globally prevalent concept, it is not unprecedented to introduce a regulatory sandbox mechanism which acts as a safe cocoon for entities to launch their products and services in a relaxed regulatory environment. For instance, the Australian Securities and Investments Commission introduced its detailed Regulatory Sandbox framework in May 2016 which allowed eligible Fintech entities, that did not have an Australian Finance Service license, to test their products and services under the Australian Regulatory Sandbox, hence saving time on regulatory compliances. Similarly, in June 2016, the United Kingdom (UK), through its Financial Conduct Authority introduced its Regulatory Sandbox framework, which provided various forms of regulatory co-operation, including but not limited to waivers, restricted authorization and individual guidance. Likewise, efforts can also be seen on the part of the Monetary Authority of Singapore which came up with its Regulatory Sandbox guidelines in November 2016. The said Regulatory Sandbox regulation ran on similar lines to that proposed by the UK Government and aimed at providing regulatory support to eligible entities before, during and after the testing process.
While it is true that the IRDAI RS Regulations have taken inspiration from the English and Singaporean regulations, the Indian regulation differs in various and important ways. It is noteworthy that the regulatory framework set up by the IRDAI did not take into consideration an essential feature of the Singapore and UK regulations which permitted regular financial institutions to apply for its Regulatory Sandbox. Insteadthe IRDAI RS Regulations only allow registered start-ups for applying for the benefits of its Regulatory Sandbox. Moreover Singapore, Australia and UK have bilateral bridging agreements with each other, which facilitate the transnational applications of innovative Fintech entities. This not only increases the inter-jurisdictional trade and the inflow of foreign direct investment (FDI) in these countries but also provides the entities a better market arena for testing their products and services. On the other hand, the IRDAI RS Regulations lack this imperative feature in its entirety which essentially goes against the Indian government’s goal of increasing FDI inflow.
Even though there are some parameters on which the IRDAI legislation falls short of its international counterparts, it has to be understood that it is a progressive piece of legislation which is actually benefitting new entrants in the FinTech market of India. With the approval of 33 health and motor insurance proposals by six months of its enactment, it can be said that the IRDAI RS Regulations are actually a positive environment for Indian FinTech start-ups.