Bank Negara Malaysia (the Central Bank of Malaysia, BNM) issued a paper called Financial Technology Regulatory Sandbox Framework in October 2016. The sandbox allows regulatory flexibility to be granted to financial institutions and FinTech companies to experiment with FinTech solutions in a live controlled environment which is accompanied by the appropriate safeguards, for a limited period.

The concept of a regulatory sandbox framework is not new as the United Kingdom, Singapore and Australia proposed it to encourage the development of FinTech innovations. The Bank of Thailand, and Hong Kong Monetary Authority also recently announced their intention to introduce a regulatory sandbox.

BNM’s approach
BNM has indicated in its Framework that it will adopt an ‘informal steer’ approach by providing guidance and advice on the modifications that can be made to proposed FinTech solutions to comply with prevailing laws; or permit participation in the sandbox.

The Sandbox is not intended to be used, and should not be used, to circumvent existing laws. However, if the proposed FinTech solution possesses strong value propositions, BNM may consider relaxing certain regulatory requirements to enable the testing of the solution in the Sandbox.

While BNM has not provided any indication on the regulatory flexibilities which can be accorded to participants of the Sandbox, the Framework provides directional guidance as to the outcomes which BNM intends to achieve. This includes ensuring, among others, sound financial and business practices consistent with monetary and financial stability are preserved; fair treatment of consumers; prevention of anti-money laundering and counter terrorism financing activities and having safe, reliable and efficient payment systems and instruments.

In contrast, the Monetary Authority of Singapore (MAS) has expressly provided that requirements relating to board composition, financial soundness, asset maintenance and credit ratings are matters that the MAS may consider dispensations. On the other hand, requirements relating to confidentiality, fit and proper criteria, handling of customer’s moneys and assets and antimoney laundering / counter financing of terrorism are not negotiable – these are largely in line with the outcomes intended to be achieved by BNM above, with a view of avoiding systemic risks within the financial sector.

More details on the approach are summarized here.

The introduction of a sandbox should be applauded as it demonstrates BNM’s acknowledgment of FinTech as a catalyst for the development of progressive financial services. It also signifies active involvement on the part of BNM in engaging with the relevant stakeholders. Such initiatives will ensure that the Malaysian financial services sector keeps up with the paradigm shift in the use of technology in financial services, and therefore continues to remain relevant regionally and globally.

Brian Chia

Brian Chia is the co-leader of Baker McKenzie's AP Insurance Group. He also heads the Corporate, Commercial & Securities Practice Group of Wong & Partners (Malaysia).