Regulation is often perceived as one of the barriers for FinTech to flourish. An important question when it comes to regulation is how to provide opportunities for FinTech growth while maintaining sufficient supervision to protect customers and the finance market. Balancing such two aspects is not an easy task. In Thailand, these concerns are recognized by key regulators including the Bank of Thailand (BOT), the Office of the Securities and Exchange Commission (SEC), and the Office of the Insurance Committee (OIC).
As FinTech is now growing rapidly, Thai regulators need to catch up with this global trend. This regulatory reform is also in line with the Nation’s “Thailand 4.0” policy which is the new economic model to develop Thailand into a valued-based economy with the aim to create creativity and innovation through the application of technology.
Since our overview of the FinTech market and the legal landscape in Thailand in February 2016, there have been many more developments in this field that we periodically provided update on. Below is the most recent developments and upcoming changes to watch out. Some regulatory initiatives may have varying implications for financial institutions, startups, technology companies and the public.
1 – Regulators declared support for FinTech
A) Regulatory sandboxes
In many countries, regulatory sandboxes have been introduced to allow FinTech players to experiment with new products or services during a limited period without being fully subject to normal requirements.
Last December, the BOT launched its regulatory sandbox for products relating to loans, payment and fund transfers, and similar transactions. Four companies have been approved by the BOT: three of which include the use of blockchain for letter of guarantee and cross-border transfer and the other one being biometrics identification.
The SEC has launched several regulatory sandboxes this year; one is a regulatory sandbox for securities and derivatives businesses. Innovative products like robo-advisors, algorithm trading, and algorithm-based investment advice may benefit from this sandbox. Another sandbox focuses on the use of FinTech to support securities clearing houses, depositories, and registrars, especially the use of blockchain technology to provide these supporting functions. Other sandboxes are at the public hearing stage, including for e-trading platforms (“ETF”) and know-your-customer technology (“KYC”). The SEC also intends to amend the definitions of several “securities businesses” and lift licensing requirements for some activities at its discretion.
Driven by InsurTech rise, the OIC has also launched the OIC sandbox to enable insurers, agents, and FinTech players to beta test InsurTech innovations. Applicants can apply to participate in the OIC sandbox platform from 1 June 2017.
B) Easing existing rules to promote FinTech
In addition to regulatory sandboxes, some regulators have also relaxed their rules with a view to support FinTech. For example, the SEC has issued notifications on “investment advisors” and “derivatives advisors” not requiring a license if their advice to the public are general non-personalized advices.
In addition to that, the SEC may also reduce the required paid-up capital for each type of securities and derivatives business that plans to use FinTech, as the use of FinTech generally lowers operational costs.
C) Company structure and operations
To support startups, the Thai Cabinet has approved a draft bill in January this year that will allow Thai individuals to establish private limited companies with one shareholder, as opposed to the current minimum of three. This will enable a small-sized business such as a startup to be registered as a legal entity without a business partner, be recognized as a juristic person, and be eligible for governmental support. The bill is expected to be issued this year.
The Ministry of Commerce is considering amendments to the Civil and Commercial Code (CCC) to: allow more flexibility to private companies, such as issuing convertible loan notes, amending rights attaching to issued preferred shares, and implementing employee stock option plans; and amending the types of mergers and acquisitions allowed for private limited companies. The startup community strongly requested these amendments. However, we expect that there will likely be a lot of scrutiny and this might create some controversies as these amendments relate to the long-established key concepts of private company law in Thailand.
D) Tax incentives
In February 2017, the Revenue Department issued a new royal decree granting five-year corporate income tax exemption for new startups (with approval from the Revenue Department) that meet certain qualifications, including being one of 10 promoted business categories.
Another recent tax incentive is personal and corporate income tax exemption for merchants who use card-accepting equipment under the National e-Payment Master Plan, allowing 100 percent deduction of the cost of the equipment for corporate income tax purposes (paid from 1 November 2016 to 31 December 2018), and deduction of a transaction fee for receiving payment by debit card through the equipment, for both corporate and personal income tax (paid from 1 November 2016 to 31 December 2021).
2 – Regulating new FinTech products and new technologies
Although the government encourages fast-growing FinTech business, these developments still need to be monitored and controlled, such as new tools for raising funds like P2P lending and equity crowdfunding.
Regulations regarding equity crowdfunding allow a qualified private or public companies to raise crowdfunding funds by offering shares through an electronic platform of a funding portal approved by the SEC. Several companies are now applying for the SEC approval. However, regulations on P2P lending have yet to be issued. The P2P lending model to be allowed under Thai law is limited to the matchmaker model, whereby the P2P platform operator can only act as a middleman between borrowers and lenders. The official regulation is expected to be issued by the end of this year.
From insurance industry side, the OIC has issued a notification prescribing criteria to regulate insurance activities via electronic channels, like offer for sale of insurance products, issuing insurance policies, and payment of insurance compensation. These will take effect from 26 August 2017.
We also see the trends of the regulators issuing general guidelines on specific issues or technologies. For example, earlier this year, the BOT issued Guiding Principles for Trusted Mobile Payment, a Guideline on Quick Response Codes for payment and money remittance.
3 – Rise of venture capital investments
Similar to FinTech startups, the Revenue Department grants tax exemptions to venture capitalists (VCs) for their investment in 10 promoted businesses in Thailand which are certified by NSTDA, provided that they register with the SEC from 1 January 2017 to 31 December 2018 and fully comply with other conditions. Incentives include exemptions from income tax on dividends received by VCs from the target company (startups in this context) and capital gains derived by VCs from the transfer of shares in the target company. Shareholders of VCs also enjoy exemptions from income tax on dividends received from VCs, and capital gains from the transfer of shares in VCs, plus tax exemptions on proceeds (in the portion exceeding the original investment) derived from a dissolution of the target company. The exemptions will last for 10 accounting periods from the registration with the SEC.
The BOT has also amended regulations to support VC investment by commercial banks and their VC subsidiaries. Several banks in Thailand have already established their VC subsidiaries to focus on VC investments especially in FinTech industry.
4 – Upcoming regulatory changes
A) Draft Payment System Act
The new draft Payment System Act consolidates current payment-related laws and regulations into one regime. The draft act is subject to change and expected by the end of 2017. Activities subject to this payment system law include “essential payment system” (for high-value fund transfer, clearing, or settlement between members, established by BOT or as announced by the MOF), “regulated payment system” (for fund transfer, clearing, or settlement), and “regulated payment service” (e.g. payment instrument or channel for goods or services, transferring money, or other transactions such as provision of credit card, debit card, or ATM card; provision of e-money for purchasing goods or services; provision of e-payment service to receive payments on behalf of sellers, service providers, or creditors; or electronic fund transfer). Service operators may need a license or to register certain payment services under the draft act.
There may be good news for FinTech, as there is a new concept of categorizing the services which require “licensing” and “registration”, based not only on the type of the services but also based on the impact of the services. Some types of regulated payment service that are “used within certain limits” or do not have “impact on the payment systems,” such as innovative payment services during a trial period, or payment services provided to a limited group of customers, may require only “registration” with the BOT. It seems like the “substantiality test” may play more roles in the e-payment licensing/registration scheme.
B) Credit Data Accessibility
At present, only financial institutions and certain types of business operators whom are members of the National Credit Bureau (NCB) have access to the centralized credit data. In order for credit-related FinTech businesses to access credit data, a draft amendment to the Credit Information Business Act, B.E. 2545 has been submitted to the MOF, to amend definition of “financial institution” to include certain FinTech businesses. There are also some discussions of open API but the road for that path is still long. However, more openness to data must come together with data protection. It is therefore very vital that the draft personal data protection law becomes law soon.
C) Digital Authentication
Thailand is planning to create an online authentication system for both individuals and juristic persons, with the purpose to facilitate transactions made with government sectors and financial institutions. The digital authentication project will be carried out in phases and expected to be fully functioned by 2019. Digital authentication will provide several benefits, such as operation, security, and compliance improvement as its digital storage reduces fraud, automated processes eliminates human error and strengthens compliance process since identity access becomes easier and more accurate.
Technology breakthroughs are vital for the financial sectors to develop, but are not enough. In the meantime, the rest of the business environment must be shaped for new technologies to be fully exploited. Laws and regulations governing business operations must suit the digital age, so it is a good sign to see regulators also become “facilitators.” Nevertheless, a key factor of the policy’s success depends on the implementation of these initiatives to update regulations and provide support in the ecosystem.