18 Feb CBN Framework for Regulatory Sandbox Operations
The Financial technology sector has seen a lot of activities in recent times, which has led to the Central Bank of Nigeria (CBN) playing catch up with the innovations of industry stakeholders. In a bid to better regulate and have a handle of the situation, the CBN, on the 12th of January 2021, released the Framework for Regulatory Sandbox Operations (Framework), joining the list of other countries (UK, Australia, Denmark, Hong Kong etc.) which have taken similar steps to better promote innovation in their financial industry.
What is a Regulatory Sandbox?
A Regulatory Sandbox is a formal process through which firms are able to conduct live test of new innovative products, services or business model in a controlled environment with regulatory oversight. The sandbox will benefit stakeholders in the fintech space, commercial banks proposing new financial products, telecom companies seeking entry into the financial sector through innovative offerings and other companies seeking to provide innovative financial products using emerging technologies.
Benefit of Framework to Entrepreneurs?
- Entrepreneurs in the sandbox will be provided with support in filing their applications for licence (where applicable) and advising on options for addressing identified risk issues by CBN.
- It facilitates dialogue between CBN and entrepreneurs in the financial sector, which will better equip the CBN with the ability to anticipate, and better prepare regulations which facilitate innovation.
- It provides entrepreneurs with an opportunity to test their product in a controlled and licensed environment before release of the product to the public at large.
- The CBN reserves the right to support participants in the sandbox by relaxing specific regulations which apply to the participants within the period of operations of the sandbox. Thus, enabling entrepreneurs test their product with less regulatory rigour.
- It gives entrepreneurs opportunity to build strategic partnerships with other sandbox participants.
Scope of the Framework
The Sandbox covers innovations in the design and delivery of payment products or services. It also covers non-regulated financial products and services using emerging technologies which have not been contemplated under the prevailing laws and regulation or do not align with any existing law or regulation.
The Sandbox application process applies to companies which already fall under existing CBN licensees and other local companies which may include telecommunication and technology companies which intend to test innovative payment services. This can also include companies proposing to provide non-regulated financial products using emerging technologies.
To be eligible to apply for the Sandbox, the applicants have to meet certain criteria;
- The product, service or solution is innovative with clear potential(s);
- Applicant will provide a proposed project within a limited transaction (value and volume) for better risk management and mitigation.
- The applicant has conducted an appropriate assessment to demonstrate the functionality, usefulness of the product as well as identify the associate risk of the product to existing structures and consumer experience.
- The applicant has necessary resources to support testing in the sandbox.
- The applicant should also have a business plan to show that the product, service or solution can be successfully deployed after the exit from the sandbox.
Adverts for applications for the sandbox process will be posted on the CBN website and local newspaper. The advert will contain the minimum criteria to shortlist applicants who qualify to be absorbed into the sandbox.
Application into the CBN’s regulatory sandbox will be made to the CBN through the Regulatory Sandbox online application platform accessed via the CBN’s official email address. The application must be submitted with a cover letter signed by an authorised signatory of the entity and addressed to the Director, Payments System Management Department, Central Bank of Nigeria, Abuja. The application would also be accompanied by required documents. The framework provides that receipt of the application will be within 5 working days after submission, but this might differ in practice.
A Letter of Approval (LoA) would be issued to an applicant if application is successful. The LoA will enable the sandbox participant to test their products upon entry into the sandbox.
The regulatory framework provides that there shall be only one sandbox cohort (the group of innovators which have been allowed to enter the sandbox at the same time for the same period) per year.
Testing process and Exit
While in the sandbox the participants will be required to be in compliance with stated filing and reporting requirements. After the grant of the Letter of Approval but prior to entry, the participants will be required to fulfil certain filing requirements, including but not limited to, providing key performance indicators which determine success of the test, customer communication plan, etc.
The participants will also be required to keep certain records while in the sandbox as well as submit periodic reports to the CBN.
The CBN may re-evaluate the approval to participate in the sandbox if the participants do not carry out their activities in compliance to the regulatory framework. However, before any such review, the CBN gives the participant a notice of intention to review to enable the participant an opportunity to respond.
A participant who opts to discontinue in the sandbox, can apply to the CBN in writing seeking its consent.
Upon completion of the sandbox test, the CBN will decide on whether the product/service should be deployed into the market. The CBN may prohibit the deployment of the product based on the failure of the product to meet agreed test measures or if the product has unintended negative consequences for the public.
The release of the framework is a good initiative of the CBN as it will enable it to better provide an enabling environment for innovation in the financial sector, especially as it affects Fintech companies.
Berkeley Legal provides advisory and support services for SMEs and businesses looking to access the Regulatory Sandbox.
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