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The Malta Financial Services Authority (“MFSA”) introduced the FinTech sandbox as a platform for sddm,FinTech operators to test the innovation for a specified period of time within the financial services sector under certain prescribed conditions.

Disclaimer: Readers of this newsletter should note that at the date of circulation of this article, the laws and regulations to which this newsletter makes reference to may be subject to further amendments which will not be reflected in this newsletter.

Introduction

A FinTech sandbox or application program interface (“API”) is a framework that innovators and testers can use to mimic the characteristics exhibited by the production environment on a real-time basis to help simulate responses from all systems an application interfaces with. Through the regulatory sandbox FinTech operators are able to experiment with innovative financial products or services.

The FinTech regulatory sandbox introduced by the MFSA aims to encourage innovation in a sustainable manner whilst offering true value and protection of consumers of financial operators within the financial services. It also acts as an enabler to enhance legal certainty within the market and encourage knowledge sharing through collaboration and open dialogue.

Scope and Eligibility

The regulatory sandbox has been created to target technology firms and established financial services providers which directly or indirectly allow technologically-enabled financial innovations in their business models, applications or products.

Technology firms and/or financial service providers are now provided by the MFSA, a platform where they can test out their innovations. Proposed solutions should be innovative and technologically-enabled, demonstrating a genuine need for testing within a controlled environment so that they inherent regulatory gaps and risks are identified.

Additionally, the solution must have identifiable benefits to consumers and be ready for testing with adequate resources to operate for a minimum of one year.

The sandbox has opened up a regulatory environment which serves as an incentive for the financial services industry. Technologically inclined firms are allowed to test out new business models, applications, processes, products etc within a regulated framework within a stipulated time frame.

Sustainability

Participants will be carefully monitored under the supervision of the MFSA whereby the latter will monitor how the inventions are being received within the financial service sector. Furthermore, the MFSA has assured that it will ensure the fair value, consumer protection, market integrity and financial soundness throughout the trial process.

The sandbox is applicable to all Fintech service providers and Fintech suppliers and other applicants who currently do not fall within the scope of the financial services in Malta.

Amongst others, the following criteria must be satisfied for applicants to be eligible for the sandbox:

Innovation

The invention shall be (i) technology-enabled and (ii) innovative-resulting in new business models, applications, processes and products within the financial services sector.

The solution must clearly indicate that it leverages existing or emerging technologies in an innovative way to provide support to the provision of financial services.

The applicant must demonstrate, through market research or other means, that their solution is different from their current solutions.

The applicant must demonstrate that the solution does not solely re-brand but scale-up and/or re-engineer existing business models, applications, processes or products within the financial services market.

The MFSA has encountered few or no comparable solutions.

Need

There exists a genuine need and objective for testing the solution within a controlled environment in order to identify any inherent regulatory gaps, challenges and risks.

The Applicant must demonstrate that the regulatory sandbox is an appropriate regulatory approach in which they can engage with the authority and release the solution within the financial services market.

The Applicant must demonstrate well defined testing objectives and performance indicators.

The applicant must demonstrate the sandbox regulatory tools will be required for the solution to function and existing financial services legislations.

The Applicant must demonstrate that the sandbox lifecycle is more beneficial when compared to the traditional authorization process with respect to the proposed solution.

The MFSA is of the understanding that the sandbox will be beneficial for the solution being tested and that it is the appropriate regulatory approach to assess the solution’s risks, challenges and potential regulatory and supervisory gaps.

Benefit

The solution shall offer identifiable direct or indirect benefit/s to consumers of financial services and the wider financial services sector.

Proposed solution aims to provide significant increase in efficiency and used experience, and a decrease in cost compared to current products on the market.

The applicant must demonstrate clearly that the proposed solution is beneficial to consumers and the wide financial services market and that they have accounted for potential negative externalities.

The Applicant must present a thought-out plan accounting for possible risks and demonstrates that they have a suitable mitigation plan which ensures consumer protection, market integrity and financial soundness.

The Applicant must demonstrate that the proposed solution can be discontinued with minimal impact to consumers and the financial services market.

The Applicant must demonstrate that the proposed solution (i) captures an otherwise undeserved nice market (ii) increases financial inclusion or (iii) enhances competitiveness of the financial services market.

Readiness

The Solution is ready for testing within the sandbox and that the applicant shall have adequate resources to operate throughout the duration of the Sandbox.

The solution clearly indicates that it leverages existing or emerging technologies in an innovative way to provide support to the provision of financial services.

The applicant must demonstrate, through market research or other means, that their solution is different from current solutions.

The Applicant must demonstrate that its solution does not solely re-brand but scale-up and/or re-engineer existing business models, applications, processes and products within the financial services market.

Lifecycle

Since the introduction of the sandbox by the MFSA, this incentive is accessible and available for applicants on an ongoing basis. However, there are different stages that an applicant must go through with the MFSA as an application process.

Proposal Stage

The applicant shall submit its proposal to the MFSA through the online proposal form.

The MFSA shall assign a participant development lead (PDL) to an applicant who shall act as a dedicated contact between the applicant and the MFSA and who shall provide the applicant with the necessary regulatory guidance throughout its sandbox lifecycle.

Upon receipt of the proposal the MFSA may, at its discretion, schedule a preliminary meeting with the applicant.

Selection Stage

The MFSA shall determine whether the applicant falls within the scope and whether its solution meets the eligibility criteria. In turn, the Applicant shall be notified whether they may proceed to the next stage or not.

Application Stage

Selected applicants which are determined as FinTech Financial Services Providers require authorization by the MFSA under the applicable law and satisfy the requirements as set out in Rule 3. Selected Applicants which are determined as (i) FinTech Supplier or (ii) Other Applicants, will be required to satisfy the requirements as set out in Rule 3. The applicant may proceed to the testing phase only upon satisfaction of the requirements as set out in Section 4 of Rule 3.

Testing Stage

Upon successful completion of the Application Stage, the Participant shall commence the Testing Phase. The Participant shall co-operate in an open and honest manner with the MFSA and inform it promptly of any relevant information. The Participant shall take reasonable steps to ensure continuity and regularity in the delivery of its solution.

Evaluation Stage

The participant shall be required to submit to the MFSA a report outlining the performance of its solution on the basis that the testing objectives and performance measures, together with its intended exist strategy as agreed upon with the MFSA during the application stage. The MFSA will determine the appropriate exist strategy to be implemented.

Exit Stage

The Participant will then, on the basis of the decision of the MFSA, either continue to operate with the Sandbox or implement the appropriate exist strategy which would either entail discontinuing the solution or continuing with his activity outside the sandbox.

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