The Reserve Bank of India (RBI), which has finally released a proper framework for the keenly awaited Regulatory Sandbox (RS) mechanism for start-ups, has specified that firms that participate in the platform will be mandatorily required to take insurance cover based on operational risk and that no legal waiver will be provided to them.
A sandbox is an enabling infrastructure or interface, which is made available to an outside innovator or fintech by a bank so that they can test their product and services in real-time, with the RBI announcing in April this year that such a platform will be created soon. The target applicants for entry to the RS, are fintech companies including startups, banks, and financial institutions and any other company partnering with or providing support to financial services businesses.
The central bank notified an ‘Enabling Framework for Regulatory Sandbox’ on Tuesday, laying down specific instructions oriented towards protecting consumer interests, especially since the sandbox will be a tool for entrepreneurs to experiment with business models. “It may be noted that entering the RS does not limit the sandbox entity’s liability towards its customers,” the RBI has warned.
“The entities entering the RS must, in an upfront and transparent way, notify test customers of potential risks and the available compensation and obtain their explicit consent in this regard. There should be an appropriate arrangement for customers to withdraw from the test,” the central bank said, adding that these entities shall be required to take liability or indemnity insurance of an adequate amount and period to safeguard the interest of the customers.
“The adequacy of indemnity cover shall depend on determination of the maximum liability based on, among others, (i) maximum exposure to a single customer (ii) the number of claims that could arise from a single event (potential for multiple claims); and (iii) number of claims that might be expected during the policy period,” it said. This policy cover shall begin with the start of testing stage and end three months after exit of the sandbox entity from the RS. Firms which are exiting the sandbox will also be needed to ensure that any existing obligations to customers are fulfilled before their exit.
Risks and limitations for participants
According to the RBI, innovators who opt to enter the platform may lose some flexibility and time, but added that “running the RS in a time-bound manner at each stage can mitigate this risk”. Bespoke authorisation and regulatory relaxations, which companies participating in the sandbox may require, can also involve time and discretional judgements, it added.
Companies under the experimental programme will also not be offered any “legal waiver” and post-sandbox testing, a successful experimenter may still require regulatory approvals before the product or service will be permitted for wider application.
“There is potential for some legal issues coming up, such as those relating to consumer losses in case of failed experimentation. Such instances may not have much legal ground if the RS framework and processes are transparent and have clear entry and exit criteria. Upfront clarity that liability for customer or business risks shall devolve on the entity entering the RS will be important in this context,” the RBI said.
Framework for regulatory Sandbox
The RBI notified an ‘Enabling Framework for Regulatory Sandbox’, laying down specific instructions oriented towards protecting consumer interests, especially since the sandbox will be a tool for entrepreneurs to experiment with business models