No industry in the economy can boom unless it is supported by the Government in the country it wishes to further expand in. A fine line exists between regulation and obstacles for the industry to boom. In light of this, the Government of India has begun to take initiatives and steps toward the stronger building of fintech in the country, paving the path for this industry to a brighter future. This post will give you a brief overview of all the regulatory initiatives that the Government and Regulators have taken to promote the FinTech in India. This is the fourth post in the series of ‘Simplifying FinTech and FinTech Laws’.
Fintech in the past decade has expanded rapidly. What once emerged as merely as an intersection point of financial services and technology, has now become an important aspect of India’s economy. With the vision of the country towards a digitized and less dependent economy with ‘make in India’, fintech has gained a larger space to expand in and function smoothly. According to the NASSCOM Report ‘Fintech Landing- Unlocking Untapped Potential’, it is because of initiatives in India that have led India to emerge as a leader for the fintech industry worldwide. According to this research by NASSCOM, India alone harbours 2% of the largest start-up base for fintech in the world and also leads in the rate of adoption of fintech at 87% adoption rate.
Not only the initiatives by the Government adversely affect the success of the fintech industry in the country, but the allied regulators of financial institutions play a role as well. These include regulators such as SEBI, RBI, Insurance Sector, etc. Such an encouraging atmosphere for the development of fintech in the country has increased faith in fintech among the consumers in the country, for easier and grass-root adoption and acceptance of fintech.
Initiatives by the Central Government
Encouragement for the Start-Ups
With the policies such as that of make in India and to boost the Indian economy, the start-ups are increasingly supported by the Government. In 2015 itself, over 12,000 start-ups in the area of fintech emerged across the world. In India, the initiative to support the start-ups was launched by the Central Government in 2016, reserving USD 1.5 billion funds to support the start-ups. Under the increased support, he start-ups began to receive in the country, there are more than 600 startups in fintech at present in India. It is in light of such an initiative begun by the Government and supported by the allied stakeholders that India progresses towards the vision of a completely digitalised economy, promoted innovation and leading economy with sustainable growth.
In further aid of this initiative that the Government has now introduced tax reliefs such as 3-year exemption from paying tax for the start-ups along with other exemptions, credit guarantee, etc.
Digitization of the Economy
The current Government fiercely promotes the digitization of the economy. Whether intended or not, the unprecedented demonetization has acted nothing less than a catalyst in increasing the digital payments in the country. Having scaled the benefits of digital payments, it is now increasingly used by the country than retreating back to the physical currency. Such an environment is an ideal environment for the fintech ecosystem to thrive in.
Apart from the policies of the Government to support the fintech, taxing regime plays a major role in the growth of the fintech industry in the country. The 2016 Budget introduced tax rebates for those traders who transacted more than 50% of their bill digitally. The Ministry of Finance further proposed withdrawal of surcharge on digital payments of cards and online used to avail government services. The surcharges as of now stay relaxed.
Protection of Intellectual Property
The fintech start-ups are supported with ease in the procurement of intellectual property (IP) acquirement. The facilitation in the acquirement of trademarks, patents, designs, etc. has led to an increase in the start-ups under the fintech industry in the country. Moreover, under the start-ups initiative, the Government offers 80% rebates for the patent costs required for the start-ups.
The Government’s plans to accelerate the economy of the country with digital India and Smart Cities have led to an increase in reliance upon fintech in the country more than ever. Not only the local fintech industry is expected to benefit out of his but the outsourcing and foreign investment are also expected to be increased to further the advancement of the fintech industry in the country.
National Payments Council of India
It is the umbrella organisation for all retail payments in India, under the guidance of RBI and Indian Banks Association. With the increase of multiple usages of mobiles in India and increased acceptance of Unified Payment Interface (UPI), there was a paved way for the National Payments Council in India (NPCI). The expected userbase of smartphones is by 2020 is 500 million. Thus, the digital footprint is expected to rise as well. Initiatives by the NPCI such as that of Rupay Cards have led to fintech adopting such technologies, penetrating further into the traditional banking system in the country.
India Stack is a set of Application Program Interfaces that allow entities such as businesses, start-ups, governments and developers to engage in the utilisation of the digital infrastructure. This unique feature of India Stack helps to solve problems in ground level in India and promote the paperless, cashless and presence-less delivery system in India. India Stack mirrors the support system offered to the telecom industry back in the 1990s for the fintech industry in the country. This has enabled the manifold increase in fintech in the country and has facilitated easy adoption of fintech by the innovators, entrepreneurs, other industries and companies. However, after the Aadhaar judgment, the India Stack programme has stopped.
Initiatives by Financial Market Regulators
The financial market regulators (FMRs) role has gravely impacted the fate of the fintech industry in the country. Some of the primary FMRs are discussed herein:
Reserve Bank of India (RBI)
One of the most recent initiative by RBI for the adoption of fintech in the financial market is allowance to set up the regulatory sandbox. This refers to the controlled environment in which live testing of digitally innovative techniques may be conducted in the arenas of e-KYC, retail payments, management of wealth, etc. RBI has also acknowledged the possibility of fintech disruptions in the financial market, in light of which certain regulatory norms have been introduced. However, it is to be noted that these are purely regulatory in nature in benefit of the consumers and fintech industries, without creating a hurdle for the boom of the fintech industry. Moreover, to better understand the nitty-gritty of fintech in influencing the traditional financial market, RBI set up an inter regulatory working group to come up with an appropriate framework for fintech without disrupting its functions. RBI in 2017 released a ‘Report on Working Group on Fintech and Digital Banking’ acknowledging fintech to be a point of attention in today’s era and uncertain regulatory regime to stunt its growth. Thus, RBI persuades other sectors to be better apprised with fintech to come up with better and definable regulatory regime so as to not cause unprecedented or unforeseen loss to this industry and continue with its growth.
However, with no uniform set of guidelines and no particular authority to govern fintech, fintech at present faces loss in this area. The aforementioned market regulators have their own policies for fintech which often overlap and defeat the purpose of facilitating policies to obstacles fintech needs to overpower to ensure its smooth functioning. The grey areas of fintech require to be urgently addressed so that the booming growth does not reduce to stunted growth of the industry India expected to lead in future. It is expected with RBI’s report and acknowledged lacuna in the current fintech ecosystem, changes are soon to begun to take place across all sectors in the financial market to ease the functioning of fintech for greater benefits.
The RBI has also introduced several small fintech spaces in order to invite comments from general stakeholders before issuing any regulation governing new technologically innovative financial products. The RBI has released a ‘Draft enabling Framework for Regulatory Sandboxes’ which proposes guidelines on governing regulatory sandboxes to be established by RBI to check on the R&D of new fintech products and services.
The RBI, as well, has recognized the need for confidentiality and data protection. The RBI’s “Master Circular on Mobile Banking Transactions in India” states that “technology used for mobile banking must be secure and should ensure confidentiality”.
Below is the table that represents how well are such fin-tech regulatory sandboxes faring. This is an independent research initiative by the author.
||Name of the Regulator
||Date of Starting
||Sandbox Name/ Project Name
||Number of Participants
|The United Kingdom
||Financial Conduct Authority (FCA)
||Launched in October 2014- First cohort of applications opened on May 2016
||The regulatory sandbox is a part of the project called Innovate by FCA
||Nearly 375 Applications (Since 2016); Nearly 131 Applications have been accepted. Sources: FCA publication on’Regulatory Sandbox lesson learnt’ https://www.fca.org.uk/publication/research-and-data/regulatory-sandbox-lessons-learned-report.pdf. Also See, Official Webpage of the FCA Regulatory Sandbox, https://www.fca.org.uk/firms/regulatory-sandbox/cohort-1
||Following sources have been referred to understand the framework of ‘Regulatory Sandboxes’ in the UK: 1) FCA publication on Regulatory Sandbox https://www.fca.org.uk/publication/research/regulatory-sandbox.pdf; 2) FCA publication on’Regulatory Sandbox lesson learnt’ https://www.fca.org.uk/publication/research-and-data/regulatory-sandbox-lessons-learned-report.pdf; 3) Guide to Financial and Regulatory Innovation https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/701847/UK_finanical___regulatory_innovation.pdf
||Monetary Authority of Singapore
||Launched in November 2016
||There are two kinds of Sandboxes that have been proposed under the MAS supervision: ‘Sandbox’ and ‘Sandbox Xpress’
||Nearly 50 Formal Applications have been considered; Half were withdrawn; 1/3rd proceeded without the need of Sandbox; remaining being approved or under review. (till 2019) Source: NUS CBFL working paper 19/04 https://law.nus.edu.sg/cbfl/pdfs/working_papers/CBFL-WPS-1904.pdf
||The low figures of participation is because MAS is very specifically selective about the applicants and MAS’ view of Sandbox as a last resort to facilitate innovation,
with the primary tool being instituting facilitative regulations in the first place. Further readings are important: https://law.nus.edu.sg/cbfl/pdfs/working_papers/CBFL-WPS-1904.pdf; MAS gidelines on Sandbox https://www.mas.gov.sg/-/media/MAS/Smart-Financial-Centre/Sandbox/FinTech-Regulatory-Sandbox-Guidelines-19Feb2018.pdf?la=en&hash=B1D36C055AA641F580058339 09448CC19A014F7; The MAS Act https://www.mas.gov.sg/regulation/acts/mas-act
||Australian Securities and Investments Commission (ASIC)
||Launched in December, 2016
||Fintech Regulatory Sandbox is a part of Project Innovation Hub by the ASIC
||As set out in ASIC’s Innovation Hub Progress Report as of October 2018, 314 entities requested and received informal assistance, and 67 new AFSLs/ACLs were granted. In 2018–19, the Innovation Hub provided informal assistance to over 190 businesses (fintech and regtech), helping them consider regulatory issues early and where relevant prepare licence or relief applications. Source:ASIC Cooperation Report 2017-18 https://download.asic.gov.au/media/4922434/annual-report-2017-18-published-31-october-2018-section5.pdf & ASIC Cooperation Report 2018-19 https://download.asic.gov.au/media/5314426/asic-annual-report-2018-19-section-5.pdf.
||The Treasury Laws Amendment (2018 Measures No. 2) Bill 2019 (Bill) could provide an example of ideal specific legislative framework related to Fintech Sandboxes given the number of benefits it proposes. The Bill aims to enhance the existing regime by enabling more businesses to test a wider range of financial products and services, for a longer period of time. The Federal Government anticipates that this will help drive competition in the financial services industry, incentivising financial providers to be more responsive to the needs of consumers. While the Bill broadens the types of credit products and services which are eligible for the regime, it simultaneously imposes stricter requirements on credit services which are already subject to the regime. Sources referred: ASIC expands Sandbox Regime https://www.lexology.com/library/detail.aspx?g=825aafdb-0cf4-4dfd-b6b0-be411bb5f957;
||Bank Negara Malaysia (BNM) through its cross-functional group the Financial Technology Enabler Group (FTEG)
||Launched in October 2016
||Till October 2019, 80 applications have been submitted under the Financial Technology Regulatory Sandbox. Source: Assistant Governor Keynote Address at the Takaful Rendezvous 2019 – “Leading in a Disruptive World – Revolutionising Takaful” at https://www.bnm.gov.my/index.php?ch=en_speech&pg=en_speech&ac=841. In 2017, there have been four confirmed participants and while in 2018 , there have been six confirmed participants (in which 1 exited later). Source: The State of Regulatory Sandboxes in Developing Countries, Digital Financial Services Observatory, Columbia Institute for Teleinformation, Columbia University, New York, https://dfsobservatory.com/sites/default/files/DFSO%20-%20The%20State%20of%20Regulatory%20Sandboxes%20in%20Developing%20Countries%20-%20PUBLIC.pdf
||Sources to refer: 1) BNM has provided a regulatory framework for the ‘Fintech Regulatory Sandbox Framework”. http://www.bnm.gov.my/index.php?ch=57&pg=137&ac=533&bb=file; 2) Infographics explain it all, https://www.myfteg.com/?page_id=1129; 3) The State of Regulatory Sandboxes in Developing Countries, Digital Financial Services Observatory, Columbia Institute for Teleinformation, Columbia University, New York, https://dfsobservatory.com/sites/default/files/DFSO%20-%20The%20State%20of%20Regulatory%20Sandboxes%20in%20Developing%20Countries%20-%20PUBLIC.pdf; 4) FAQs related to Sandbox, https://www.myfteg.com/?page_id=1133.
||Hong Kong Monetary Authority
||Launched in November, 2016
||Fintech Supervisory Sandbox (FSS)
||Nearly 170 Tested Participants [By the end of 2017, 28 fintech products tested (HKMA Annual Report 2017, Pg109, https://www.hkma.gov.hk/media/eng/publication-and-research/annual-report/2017/AR2017E.pdf), then by 2018, 42 products have been tested (HKMA Annual Report 2018, Pg.7, https://www.hkma.gov.hk/media/eng/publication-and-research/annual-report/2018/AR2018E.pdf) and till October 2019, around 92 new technology projects have been tested (Usage of the FSS until the end of October 2019, https://www.hkma.gov.hk/eng/key-functions/international-financial-centre/fintech/fintech-supervisory-sandbox-fss/)%5D. Nearly 84 products have been rolled out in the Market successfully (14 in 2017, 28 in 2018 and 42 till October 2019)
||Following sources are required to be referred to: HKMA-FSS framework of guidelines, https://www.hkma.gov.hk/media/eng/doc/key-information/guidelines-and-circular/2016/20160906e1.pdf; HKMA Annual Report 2017, Pg109, https://www.hkma.gov.hk/media/eng/publication-and-research/annual-report/2017/AR2017E.pdf.
|Securities and Futures Commission (SFC)
||SFC Regulatory Sandboxes
||In 2018, there have been 2 firms that have been tested. (Source: https://bfsi.economictimes.indiatimes.com/news/regtech/global-sandbox-by-gfin-to-boost-cross-border-innovation-in-financial-services-fintech-association-of-hong-kong/69376356) Checked all the official reports but they have not provided any explicit number. I have scheduled a call with Syed Musari, Chairman of the HK Fintech Assn. [On call also he said there are 2 only such firms that have been confirmed till now)
||Following Sources: ‘Circular to announce SFC Regulatory Sandbox’, https://www.sfc.hk/edistributionWeb/gateway/EN/circular/openFile?refNo=17EC63
|Insurance Authority (“IA”)
||Launched in September, 2017
||IA Insur-tech Sandbox
||Since the launch of Insurtech Sandbox until end February 2019, IA received eight sandbox applications and two were completed and rolled out to the market. Source: Discussion Paper, Legislative Council Panel on Financial Affairs, LC Paper No. CB(1) 70/18-19(04), Pg.6, https://www.legco.gov.hk/yr18-19/english/panels/fa/papers/fa20190401cb1-760-4-e.pdf
||Following sources can be referred to: 1) https://www.ia.org.hk/en/aboutus/insurtech_corner.html#1 ; 2) Discussion Paper, Legislative Council Panel on Financial Affairs, LC Paper No. CB(1) 70/18-19(04), Pg.6, https://www.legco.gov.hk/yr18-19/english/panels/fa/papers/fa20190401cb1-760-4-e.pdf
||Central Bank of Bahrain’s FinTech and Innovation Unit
||Launched in May 2017
||The Regulatory Sandbox
||Since its launch in 2017, 35 Fintech participants have been included in the Sandbox. (As provided on the official website in the section of ‘Regulatory Sandbox Register’ at https://www.cbb.gov.bh/fintech/). Although, till 2018 CBB received 48 applications. (Source: CBB Annual Report, https://www.cbb.gov.bh/wp-content/uploads/2019/04/CBB-Annual-Report-2018-English-1.pdf)
||Following sources: 1) ‘Regulatory Sandbox Register’ at https://www.cbb.gov.bh/fintech/ ; 2) CBB Annual Report, https://www.cbb.gov.bh/wp-content/uploads/2019/04/CBB-Annual-Report-2018-English-1.pdf; 3) The Circular https://cbb.complinet.com/net_file_store/new_rulebooks/c/o/Cover_letter-Regulatory_Sandbox-Amended28Aug2017.pdf
||De Nederlandsche Bank (DNB) Aand Dutch Authority for the Financial Markets (AFM) as per their MoC (Memorandum of Cooperation)
||Launched in January 2017
||Regulatory Sandbox’ under the Innovation Hub
||There is no specifc register or data that is available for the number of entities that are strictly part of the Regulatory Sandbox (Even in their guiding paper released in December 2016, they specifically stated in Section 4, at Pg.5, that “such requests are confidential and will be treated as such”.) Although, the regulators have shared that total 650 queries has been received by the Innovation Hub and Sandbox together till 28th August 2019 (Source: Report DNB-AFM, Continuing Dialogue, InnHub and RegSandbox: lessons learned after three years, https://www.dnb.nl/en/binaries/Continuing%20dialogue_tcm47-385301.pdf)
||Following Sources can be referred to: 1) De Brauw Blackstone Westbroek, https://www.debrauw.com/alert/dnb-afm-create-regulatory-sandbox/; 2) Guiding paper/Framework related to Regulatory Sandbox, https://www.dnb.nl/en/binaries/More-room-for-innovation-in-the-financial%20sector_tcm47-361364.pdf?2020011512; 3) Report DNB-AFM, Continuing Dialogue, InnHub and RegSandbox: lessons learned after three years, https://www.dnb.nl/en/binaries/Continuing%20dialogue_tcm47-385301.pd; 4) European Banking Authority, Report, FinTech: Regulatory sandboxes and innovation hubs, https://www.esma.europa.eu/sites/default/files/library/jc_2018_74_joint_report_on_regulatory_sandboxes_and_innovation_hubs.pdf.)
||Financial Services Regulatory Authority
||Launched in August 2016. Although, the first cohort started in May 2017
||FinTech Regulatory Laboratory (RegLab)
||Until October 2019, 185 Applicants, 74 Participated – [First Cohort: 11 Applicants, 5 Selected (Official Press Release, https://www.adgm.com/media/announcements/abu-dhabi-global-market-admits-first-5-regional-and-international-reglab-applicants); Second Cohort: 22 Applicants, 11 Selected (Official Press Release, https://www.adgm.com/media/announcements/abu-dhabi-global-market-admits-2nd-reglab-cohort-with-11-more-local–global-fintech-firms); Third Cohort: 69 Applicants, 26 Selected (Official Press Release, https://www.adgm.com/media/announcements/abu-dhabi-global-market-admits-3rd-reglab-cohort-with-more-uae-fintech-firms); Fourth Cohort:83 Applicants, 32 Selected (Official Press Release, https://www.adgm.com/media/announcements/adgm-admits-4th-reglab-cohort)%5D.
||Following sources: 1) The official Guidance, The guidance paper, http://adgm.complinet.com/net_file_store/new_rulebooks/f/i/FinTech_RegLab_Guidance_VER01_31082016.pdf; 2) Entire legal framework and associated papers can be found here http://adgm.complinet.com/en/display/display_main.html?rbid=4503&element_id=13995.
Securities Exchange Board of India (SEBI)
The presence of SEBI has largely affected the financial market for over two and a half decades now. The interface of technology in the financial market has only led to a rise in the financial sector. It has led to efficiency in the system of trading, reduced costs of transactions and an increase in consumer base. Not only this, technology has played a significant role in democratising the financial market. While these remain the immediate effect felt of technology as it entered the financial market, more recent are the machine-based and algorithmic trading. SEBI has warmly welcomed technology in the market with screen-based trading, dematerialisation of shares and using it as a platform to offer nationwide trading. The capital market in India with such innovations backed by SEBI has witnessed the transformation in recent years.
The innovation in the insurance sector has always been thought about twice, such that its adoption has remained the slowest in this sector in the financial market. However, the past decade with the rise of fintech has seen the regime of insurance sector change, especially with the digital channels and process automation. Technology has further led to the addition of personal touch and customised services for consumers. The fintech had led to increasing common conscience of the society to repose faith in the insurance sector due to customised services and cost-effective functions. Fintech has ensured that the start-ups in the insurance sector do not act as a tool of disruption in the insurance sector and spread a sense of insecurity amongst the existing companies but act as a collaborator, collate the efforts of all and direct services for the benefit of the consumers.
Solve India’s problems’: Modi launches Rs 100 billion fund, generous tax breaks for Indian start-ups, First Post, 17 January 2016, http://www.firstpost.com/business/pm-modis-grandinitiative-for-indian-start-ups-a-rs-10000-cr-fund-3-year-tax-rebate-2587272.html accessed on 25 May 2016.
Budget 2016: Start-ups get 100 per cent tax exemption for 3 years on profits, 29 February 2016, DNA India, http://www.dnaindia.com/money/report-budget-2016-start-ups-get-100-taxexemption-for-3-years-on-profits-2183981(last accessed on 25 May 2019).
Manisha Shroff, Nikita Nehriya, Ankit Chavan and Praneetha Vasan, Data Privacy: Have Banking Laws in India kept pace with Technology, Indian Law News Vol 9 Issue 2, at https://www.khaitanco.com/PublicationsDocs/IndiaLawNews-KCOcoverageManishaShroff-Copy%20(2).pdf