Securities and Exchange Commission of Pakistan (SECP) is arguably the most proactive of all regulatory bodies in Pakistan. SECP has proved itself to be the most technology embracing public sector organization in Pakistan and has over the years introduced many technology-assisted processes in order to modernize the corporate sector and to increase the ease doing business in Pakistan.
SECP has also introduced a number of steps for the development, growth and reach of technology driven solutions especially in financial services industry. An important step in this regard was the introduction of the Regulatory Sandbox Guidelines, 2019.
What is the regulatory sandbox?
The regulatory sandbox is a tailored regulatory environment for conducting limited scale live tests of innovative products and emerging business models that are not recognized, protected, or governed by the current regulations. The purpose of this “testing ground” is to assess the viability of new products and business models to be launched on full-scale and to develop a compatible and enabling regulatory framework that is conducive for innovative solutions.
What type of products can be tested through the regulatory sandbox?
New products, services, and business models in any of the sectors regulated by SECP and falling under below categories may be tested through the regulatory sandbox:
- Innovative product development or distribution
- Alternate financial intermediation platforms
- Digital Assets
- Innovative insurance underwriting
- Insurance policy servicing
- Alternate risk transfer mechanisms
- Financial/ robotic advisory
- Claim adjudication and payment
- Artificial Intelligence
The proposed product, service or business model should, inter alia, satisfy below criteria:
- Be innovative and should not be covered under current regulatory regime.
- Provide identifiable direct or indirect benefit to the consumer.
- Adequately identify and address direct and indirect risks for customers and markets.
- Put in place suitable mitigation plan to manage risks and ensure protection to customers through a complaint redressal mechanism.
- Promote equal opportunity to access financial services in Pakistan and should increase financial literacy.
How is the regulatory sandbox operated?
The regulatory sandbox is being operated by SECP on a cohort approach basis. A cohort is a complete experimentation cycle consisting of many stages in which the participants test their innovations in live environment for a specified period. The decision when to start a cohort after completion of the previous cohort is taken by SECP.
Who can participate in a cohort?
Domestic and foreign entities, incorporated or unincorporated, may apply for participation and testing of their products, services, or business models through the regulatory sandbox.
What are the various stages of a cohort?
A cohort consists of below stages:
Announcement and application submission
SECP will make a public announcement and invite applications for participation in the cohort. The interested entities will be required to submit complete applications before the deadline set in the public announcement.
Preliminary screening of applications
After the deadline, SECP will conduct the preliminary screening of the applications. Incomplete applications and those lacking clarity and vision will not proceed to the next stage. SECP will communicate the result of the preliminary screening to the applicants.
Detailed review and selection
After the preliminary screening, SECP will commence a detailed review of the applications which have passed the preliminary screening stage. During this phase, each application will be thoroughly evaluated by SECP against the parameters given in the Guidelines. SECP may ask for additional information from the applicants during this phase. This evaluation will be completed within forty-five working days. Thereafter, SECP will issue the letters of approval (LoA) to the successful applicants for participation in the cohort. The LoA will include, amongst others, the conditions subject to which an applicant will be allowed to live test its product, service, or business model.
The successful applicants will be allowed to live test their products in the sandbox environment for the period of up to six months. In certain circumstances, SECP may extend the period of live testing or its commencement. Each participant will submit period reports to SECP with such content, in such format and at such frequency as mentioned in the LoA.
At the end of the testing period, each participant will submit a completion report to SECP. The completion report will contain an objective assessment of the potential impact of the product, service, or business model. The completion report will also contain the proposal on how the participant will comply with the legal and regulatory requirements.
SECP will analyze the completion report submitted by each participant. Thereafter, SECP will decide whether or not to allow the participant to scale up its operations. SECP will also take decision with respect to the formulation of a regulatory framework or any amendments to the existing regulatory framework for facilitating any new product, service, or business model.
What is the procedure for participating in a cohort?
An entity wishing to participate in the cohort will submit to SECP an application in a prescribed format before the deadline given in the public announcement made by SECP. Certain documents including the proof of payment of the application processing fee, the profiles of the key management personnel of the applicant, the business plan and a clear exit strategy will be submitted to SECP along with the application. The business plan should include, inter alia, below information:
- Proof that the product, service or business model is unique;
- the potential benefit of the product or service to the consumers and the financial market;
- the product or service is sufficiently mature for testing in a live environment;
- justification for participation in the regulatory sandbox with the perceived outcomes and objectives;
- the applicant has adequate arrangements and resources to support the live testing of the product or service;
- the potential and perceived risks of a live testing of the product or service;
- the measures to protect the interests of investors, consumers and other market participants and the risk mitigation strategies in case the test fails; and
- a clear intention to scale-up the operations in case of a successful testing.
What was the outcome of the first cohort opened in February 2020?
In January 2020, SECP made public announcement of the opening of the first cohort. SECP received thirty-two applications for participation in the first cohort. Nineteen applications were rejected during preliminary screening. Another seven applications were rejected after detailed review and only six products were selected for participation in the first cohort. The products and services approved for live testing were digital insurance and brokerage services, crowdfunding, peer-to-peer debt financing, robo-advisory and a centralized online platform for mutual funds. The first cohort is underway.
Majeed & Partners, Advocates & Counsellors At Law is a Lahore based law firm providing a wide range of services across all industries. We have an experienced team of legal experts who are constantly monitoring the legal and regulatory developments occurring in the financial and technology sectors. If you are a fintech startup or an established fintech company planning to test a new product or looking to enter the local market and requires reliable legal advice or assistance, please feel free to contact us and we will be very glad to assist you.