In recent years, there has been a trend among financial regulators in jurisdictions around the world, including in Australia, Malaysia, Singapore, the UAE and the UK, to allow technology firms to operate business within the scope of a “regulatory sandbox”. A regulatory sandbox refers to a predefined scope of restrictions within which a technology firm may operate exempt from some or all of the regulations that would normally be applicable, in order to test new products, services or business models that depend on innovative technology.
In a regulatory sandbox, business is conducted under direct supervision of the regulator. In order to limit risk to the general public, a participant may only offer its products or services to a limited group of consumers within a limited period of time, and under specific conditions.
Generally, financial regulators establish regulatory sandboxes because its regulations are not able to keep pace with the speed of developments in the field of financial technology (fintech), the difficulty for businesses to follow the complex web of rules and regulations, and because certain fintech products or services tend to contain components that are regulated as well as those that are not. Therefore, regulatory sandboxes offer a means for regulators to monitor and study new developments, as well as to devise new regulations on an ad hoc basis just as new innovations are being introduced to the market.
In Thailand, a regulatory sandbox for fintech was promulgated by the Bank of Thailand (BOT) on 21 December 2016 in the form of a “practice guideline” that specifies qualifications for participation and rules to be followed once permission is granted to operate within the regulatory sandbox. BOT’s stated goals in opening the regulatory sandbox and supporting fintech include allowing consumers greater and quicker access to financial capital and services from more diverse sources.
The BOT also seeks to allow fintech developers, including financial and non-financial institutions, to continue innovating financial technology in order to increase the efficiency of financial services, which will lower the cost of doing business and increase the competitiveness of Thai businesses, domestically and abroad. Fintech also allows financial services providers to develop a large database of their experiences, which may be used to improve their services in the future and benefit the consumer. Apart from the BOT’s own goals, the establishment of a regulatory sandbox helps accomplish the following objectives:
- It provides an opportunity for new players to enter the market, such as foreign firms and brand-new start-ups, through a government sanctioned platform;
- Businesses operating within the regulatory sandbox are directly supervised by the BOT and both consumers and the business operators are protected from financial damages in the event a business is not successful; and
- Established players, such as large financial institutions, may be introduced to new fintech start-ups through the regulatory platform, and both parties are given an opportunity to partner with one another.
The BOT’s regulatory sandbox is open for participation to financial institutions, fintech firms, and general tech firms. Additionally, in granting permission to participate in the regulatory sandbox, the BOT requires that participants have measures in place to address matters such as good corporate governance, confidentiality and data privacy, as well as security and integrity of IT systems.
The technology to be tested in the regulatory sandbox must be one that is within the scope of authority of the BOT, such as lending, payment, or any other type of transaction that the BOT deems appropriate. In light of this, because equity crowdfunding (ECF) platforms are regulated by the Securities and Exchange Commission of Thailand, not the BOT, it appears that such ECF platforms are not allowed to participate.
As the BOT’s regulatory sandbox has just been launched, it remains to be seen how successful it will be in promoting fintech in Thailand. The practice guidelines published by the BOT impose strict requirements on potential participants and it is not clear to what degree participants in the regulatory sandbox will actually be exempt from normal rules and regulations.
Participation in the regulatory sandbox does not exempt participants from having to comply with other laws that are beyond the authority of the BOT, such as laws relating to electronic transactions, anti-money laundering, and anti-terrorism.
Furthermore, according to the practice guidelines, participants are not exempt from having to apply for any applicable licences that are necessary to conduct their intended businesses, which could present a major obstacle to foreign and/or smaller fintech start-ups.
Nevertheless, fintech firms interested in expanding to Thailand are advised to consult with a knowledgeable legal adviser and properly plan their business operations.
Jason Corbett is the managing partner at Silk Legal in Bangkok
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