Author: Bai Shi Pan (National University of Singapore professor, former dean of the Monetary Authority of Singapore Institute)
Editor's Note: This article was originally published in China Finance and was originally titled "How Singapore Regulates Fintech"
In recent years, fast-growing FinTech start-ups have shown great potential for revolutionizing innovation by leveraging new technologies. These companies are likely to be strong competitors to existing companies. However, these FinTech startups do not have the financial strength and do not meet the current regulatory requirements for licenses required to provide financial services, such as good business and management records. How can regulators promote the innovation of these startups, promote competition in the financial services sector, and bring benefits to financial consumers? How to ensure that the regulatory environment is suitable for this disruptive innovation? These have become the difficulties and challenges faced by regulators.
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Develop FinTech regulatory measures
At this stage, the Monetary Authority of Singapore (MAS) has adopted the following policy measures to regulate this new wave of innovation in the financial services sector.
First, MAS will adopt a differentiated approach to different technologies and their applications. It is worth noting that, unlike traditional banks that provide comprehensive services and products, FinTech startups currently tend to develop new technologies to improve specific financial services or products, so the risks inherent in their actions or due to their technical nature The risks are different from those of traditional financial institutions. A “one size fits all” approach is clearly inappropriate. For example, digital payment and digital currency identification issues; the impact of P2P lending platforms and crowdfunding on consumer protection and fraud risks; and cloud computing and big data cybersecurity risks. The MAS will develop regulatory policies after assessing the advantages of each technology and considering which financial activities it will apply to and the likely impact.
Second, MAS will adopt a "risk-oriented" approach in the area of FinTech innovation currently not regulated by it. The MAS is fully aware that the early introduction of regulation can stifle innovation and hinder the use of new technologies, so the MAS has always ensured that regulation cannot lead innovation. Instead, MAS uses the principles of materiality and proportionality. This means that when new technology brings significant and significant risks, regulation will be in place. In addition, regulatory action must be proportional to the risks posed. For example, MAS supervises banking institutions mainly because banking institutions absorb deposits from ordinary people. Securities (debt or equity) crowdfunding platforms (Securities (debt or equity) crowdfunding) are not allowed to absorb deposits, investors are limited to recognized or qualified investors, so MAS began to reduce the regulatory requirements for these platforms. However, when some crowdfunding platforms began to help companies raise funds from retail investors, MAS took measures to require these platforms to obtain MAS licenses in advance and comply with minimum capital and information disclosure requirements. Its purpose is to strike a balance between providing securities financing to startups and SMEs and protecting investor interests. The MAS also stated that if the size of this financing platform becomes very large and affects the stability of the financial market, the MAS may consider implementing more stringent capital prudential supervision measures such as capital adequacy ratios, credit ratings and fund solvency to strengthen The ability of individual participants and other measures to consolidate the stability and resilience of the entire market.
Third, MAS released the “FinTech Sandbox Supervision Guidelines” on November 16, 2016, in which MAS proposed “Sandbox Supervision” to provide a real environment for testing Fintech solutions developed by FinTech startups and large financial companies. MAS is keenly aware that the FinTech space is booming and frictions caused by existing regulatory requirements may slow the innovation process. In addition, according to MAS, "In some cases, it is unclear whether a particular fintech solution meets regulatory requirements or poses an unacceptable risk. Failure to give the opportunity to try because of this uncertainty may stifle Promising innovations can lead to missed opportunities. "
MAS realizes that failure is often a feature of such FinTech tests, and the purpose of "sandbox supervision" is to provide appropriate protection measures to control the possible adverse consequences and costs to customers and the entire market after failure, rather than prevent failure completely.
Therefore, after the “laboratory environment” test, “sandbox supervision” will provide financial services launched by FinTech startups or financial institutions using innovative Fintech solutions to be enabled in real customer environments (production environments) But this needs to be done in a specific space and time, so the consequences of failure can be controlled. A "sandbox" cannot eliminate all risks, because failure is an inherent characteristic of innovation. However, the "sandbox" helped open up a relatively safe and innovative space for Fintech solutions to experiment. If the trial fails, its impact on consumers and financial stability will be limited.
During the “sandbox supervision” period, MAS will use a risk-oriented approach to set up the most appropriate and effective form of regulatory support to facilitate testing in the “sandbox”. MAS will develop regulatory requirements or relax existing regulatory requirements based on the individual circumstances of the applicant. Where regulatory requirements can be relaxed include credit ratings, financial soundness, management experience, business records, and MAS guidelines such as technology risk management guidelines and outsourcing guidelines. However, MAS will not maintain confidentiality of customer information, suitable and proper candidates, especially the honesty and integrity of "sandbox" operators, the handling of customer funds and assets by third-party intermediaries, anti-money laundering and the fight against terrorist financing. Standards, etc.
In addition to the regulatory support described above, MAS encourages “sandbox” program applicants to actively discuss with MAS FinTech office other forms of support that MAS may provide, such as financial support, cross-agency support, mentor guidance, regulatory framework training, and application programming interfaces ( API) acquisition, business partners, manpower, shared office space, introduction of business opportunities, and provision of a cloud environment for "sandbox" testing. MAS will explore the most appropriate way to provide this non-regulatory support.
The MAS states that applying for a “sandbox” program to test the use of innovative FinTech solutions to provide financial services should be evaluated according to the following evaluation criteria:
(1) Financial services to be launched should include new technologies or use existing technologies in innovative ways. For example, secondary research should indicate that there are few or no similar products to choose from in the Singapore market;
(2) The introduction of financial services should solve problems or bring benefits to consumers or the industry. For example, these services can be supported by relevant consumers or industries;
(3) After the "sandbox" trial, the applicant intends and has the ability to launch a more successful financial service in Singapore. If there are other reasons why the test of financial services cannot be widely launched in Singapore, such as the financial service is not feasible or widely applicable in Singapore, the applicant should continue to contribute to Singapore in other ways, such as continuing to develop Launched financial services;
(4) The "sandbox" test scenario and the expected results of the test should be clear, and the "sandbox" implementation entity should report the project progress to the MAS as planned;
(5) Clearly define appropriate boundary conditions for testing, and implement the "sandbox" rules while fully protecting the interests of consumers and maintaining the safety of the industry;
(6) The major risks arising from the launch of financial services should be assessed and reduced. For example, when applying for a "sandbox" test, provide evidence to launch a preliminary test of financial services, determine the risks found in the preliminary test and make recommendations for reducing the risk;
(7) If the rollout of financial services must be discontinued, or if they can be rolled out more extensively after completion of the "sandbox" test, then an appropriate exit and transition strategy should be developed. In addition, MAS states that a "sandbox" may not be suitable for the following:
(A) the launch of financial services is similar to those already provided in Singapore, unless the applicant can prove that;
(I) different technologies are being applied;
(Ii) The same technology is applied in different fields.
(B) The applicant has not demonstrated that due diligence has been performed, including testing of the proposed financial services in a laboratory environment, and understanding of legal and regulatory requirements related to the proposed financial services.
According to MAS, the solution under the "Sandbox" plan will only allow a limited number of customers to try it out, and only allow testing for a certain period of time. During this time, they can measure the customer's experience and assess the effectiveness of the product's risk exposure and mitigation measures.
The "sandbox" will be deployed and operated by the applicant, and MAS will provide appropriate support by relaxing certain legal and regulatory requirements. However, it is worth noting that the specific legal form or structure of the "sandbox" implementing subject has not yet been clarified.
If the "sandbox" implementation entity needs to extend the test time, it should apply to the MAS at least 1 month before the expiration date, and provide reasons to support the extension application. For example, after considering customer feedback or correcting deficiencies, additional time is required to improve the financial services under test, or the “sandbox” implementing entity needs more time to comply with relevant legal and regulatory requirements. The application will be reviewed by MAS and will be approved on an individual basis.
The sandbox will stop testing under the following conditions:
(1) According to the latest test scenarios, MAS is dissatisfied with the failure to achieve the expected purpose and result set with the "sandbox" implementation subject;
(2) The "sandbox" implementing entity cannot fully comply with relevant laws and regulations at the end of the sandbox period. If such a situation can be predicted in advance, MAS encourages "sandbox" implementing entities to communicate with MAS as soon as possible;
(3) MAS found defects in the test, that is, the financial services introduced by the innovative FinTech solution caused more risks to customers or the financial system than its benefits, and the "sandbox" implementing entities also believed that the problem was in the "sandbox" "Cannot be resolved within the time limit;
(4) MAS will terminate the test if the "sandbox" implementing entity violates any of the regulatory conditions that should be observed during the "sandbox" period;
(5) The "Sandbox" implementing entity has notified MAS that it will withdraw from the "Sandbox" at its discretion.
The "sandbox" implementing entity shall ensure that before exiting or stopping the "sandbox", it must fully fulfill all of its obligations when providing financial services to customers in the "sandbox".
On the other hand, after successfully completing the "sandbox" test, applicants can launch financial services more widely, provided that:
(1) Both the MAS and the "sandbox" implementation entities believe that the implementation of the "sandbox" plan has achieved the expected test results;
(2) The implementation body of the "sandbox" fully complies with relevant laws and regulations.
If the "sandbox" implementation entity does not expect to meet the legal and regulatory requirements when exiting the "sandbox", it should communicate with the MAS as soon as possible, and can apply to the MAS to extend the "sandbox" time limit to fully comply with the legal and regulatory requirements. . MAS will conduct assessments based on individual actual conditions to encourage FinTech innovation and protect consumer rights, while maintaining a level playing field.
Finally, although the “FinTech Sandbox Supervision Guidelines” clarifies the application process and approval process and guides applicants on how to apply for a “sandbox”, the guidelines are principle-based and have some flexibility so that MAS can coordinate and help more The company conducts tests to provide various financial services. At the same time, MAS does not rule out the possibility of adopting other regulatory tools under appropriate circumstances to the extent permitted by law.
Although MAS has issued the "FinTech Sandbox Supervision Guidelines" on November 16, 2016, there is also an insurance broker PolicyPal that can conduct business without a license from March 2 to August 31, 2017 in the sandbox. Tested its application of artificial intelligence to simplify and digitalize insurance client and insurance company's policy management, and successfully completed the sandbox test plan. However, the specific implementation details of sandbox supervision have yet to be determined in practice. For example, the "sandbox" test cycle, the size of the customer sample tested, etc. Considering that various FinTech solutions may appear, it is difficult for MAS to predict in advance what kind of "sandbox" test scenarios or conditions may be proposed by the regulatory agency to cooperate with various FinTech solutions. Specific implementation details can only be confirmed in practice. This is completely understandable.
In addition, in the author's opinion, it is worth noting whether the company applying for testing after successfully completing the "sandbox" can fully comply with relevant legal and regulatory requirements in order to continue to implement FinTech solutions in a wider range of scenarios. Because in essence many FinTech startups are strong in technological innovation, but due to the lack of financial strength, resources, and business records, they are also unlikely to build strength during the "sandbox" implementation to meet the prudence proposed by regulators Sexual requirements. Therefore, one possible outcome is that MAS may design regulatory requirements around the types of FinTech solutions, similar to the current “activity-based” regulatory approach to capital market activities adopted by MAS; it is also possible that we will look at To more FinTech startups to cooperate with existing strong financial institutions, so that FinTech solutions can be more widely used while complying with relevant legal and regulatory requirements under the protection of these powerful financial institutions.
In any case, it should be clear that, so far, according to MAS's response to Fintech, MAS recognizes that financial technology has developed rapidly and may be disruptive, but it may also ultimately improve the efficiency of financial markets. As a result, MAS recognizes the need to adopt a responsive and forward looking regulatory approach to further enhance FinTech's ability to innovate and thrive. It also requires regulators to develop “smart regulatory” policies. Be innovative. For example, the proposed “sandbox supervision” plan allows rapid testing of innovative FinTech solutions and further shortens the “time to market” of FinTech solutions on the premise that the solutions prove to be successful; on the other hand, if the solution Failure can reduce trial and error costs. This is in line with Singapore's vision of becoming a "smart financial center", a key driver of which is to provide a regulatory environment conducive to innovation and safe use of new technologies.
Monetary Authority of Singapore Website