Credits: Notes compiled by Sara Irina Md Rijaluddin
On 12 August 2016, Next Money organised a full-house of 130 pax Forum on Bank Negara Malaysia’s (BNM) FinTech Regulatory Sandbox. The event was supported by Wong and Partners, Microsoft Malaysia, WTF Accelerator, MoneyMatch and Transcendz.co. It was held in Microsoft Malaysia’s office in Petronas Tower 3, Kuala Lumpur.
Background of BNM’s Discussion Paper
The Discussion Paper on the FinTech Regulatory Sandbox was published by BNM on 29 July 2016. The introduction of the Sandbox is a key initiative by BNM in providing a conducive regulatory environment for the adoption of innovative financial technology solutions, following the establishment of BNM’s Financial Technology Enabler Group (FTEG) on 2 June 2016.
The Sandbox, a favourite new concept by global regulators, is essentially about providing a “safe space” for new businesses or technologies to test innovative products, solutions, services, business models and delivery mechanisms in a live environment without immediately incurring all the normal regulatory consequences of engaging in the activity in question. In the Malaysian context, this will allow regulated financial institutions and FinTech companies looking to do businesses regulated by BNM to experiment with FinTech solutions subject to appropriate safeguards and regulatory requirements.
BNM’s discussion paper sets out the eligibility criteria, minimum standards and requirements as well as the proposed approach in operationalising the Sandbox. The Discussion Paper is expected to be finalized by Q4 2016.
The event began with Sue Wan’s introductory opening to the Discussion Paper. Sue commends BNM in publishing the Discussion Paper by noting that this is a new attitude of the Central Bank in approaching the industry for feedback and this reflects a new way of re-looking the regulatory framework.
She divided the Sandbox into three key sections:
- Who can play?
Para 4.1 refers to the applicant’s requirements including having a genuinely innovative product/solution, necessary resources, a business plan etc.
- What are the rules in the Sandbox?
Para 6.1 requires successful participants into the Sandbox to fulfill minimum standards and requirements set out in Para 6.3, taking into consideration the nature, size and complexity of their operations.
- When will one firm graduate from the Sandbox?
Para 9.1 caps the testing period to 12 months unless permission is given to extend by BNM.
Sue Wan also highlighted other important considerations that FinTech companies should look into including:
- Data protection
- Consumer Protection/dispute resolution
- Intellectual property
After Sue’s session, it was followed by the panel discussion with Sam Shafie (CEO and Founder, WTF Accelerator), Sue Wan (Associate partner from Wong and Partners) and Naysan Munusamy (Co-Founder and Director, MoneyMatch and former banker from Goldman Sachs, Standard Chartered, and Affin Bank) moderated by Jason Lee (Next Money Global Chapters Director).
Question 1 – Cooperation vs disruption
The first question that was expressed by an audience member was with regards to Para 1.8 where it stated that the Sandbox policy prefers FinTech companies cooperating with financial institutions rather than sole start-ups developing technologies than actually disrupts financial institutions. The individual also asserted some concerns on the preference towards locally-incorporated companies and the creation of high-value added jobs in Malaysia.
Naysan noted that even though the Sandbox has a preference for complementary technologies and cooperation with financial institutions; there is nothing legally stopping any disruptive technology from being effected.
The audience though should note that the central bank’s role is first and foremost, to ensure the financial stability of the system. It was not a surprise to have such provision in the Discussion Paper. Also, BNM will always have to prioritise locally incorporated companies as part of the overall economic development agenda. However, perhaps in the future, some exceptions can be made. For example, Uber when it first came into Malaysia was not welcomed by regulators – but now it is already technically accepted. However, it can be attributed that Uber is already a very well backed up start-up when it came in and was able to withstand tough regulations and opposition. Smaller financial disruptors might have a problem.
Sam was in agreement that the Sandbox concept is very regulator-centric but he drew similar experience from the Securities Commission’s equity crowdfunding framework which was very restrictive initially but eventually certain rules from the guidelines were loosened. Ultimately, the regulators have their emphasis on investor protection, and they will not and cannot run away from their statutory mandate. Hence, he reasoned that FinTech entrepreneurs should not be too concerned with the strict regulations yet.
Sam calls upon for banks and start-ups to work together because he sees many benefits of such cooperation. For the start-ups, not only will they receive funding and a strong partnership with an established institution to drive the product development, the start-up could also leverage on the bank’s data of clients etc to further enhance the product and solution.
The fact that Bank Negara’s paper introduced an “informal steer” in Para 1.5 demonstrates their willingness to engage with the industry and how they want to help. With regards to contributing to value-added jobs, that is a given expectation by BNM. Surely whichever start-up out there must contribute back to the ecosystem and ultimately, to the economic development of Malaysia.
Question 2 – What does it take to be a successful FinTech company – the Malaysian success story?
Sam’s solution was simple – to make something people want. Naysan urged entrepreneurs to create something original as Malaysians are too inspired by products from other countries. He wants Malaysians to think beyond Malaysia and think ASEAN. However, scaling up to other countries in ASEAN is acknowledged to be difficult as there are different legislations governing those jurisdictions.
Sue concurred with Naysan that scaling up is difficult as resources need to allocated for different lawyers, tax advisors etc for different countries. Every country does regulate differently. However, in certain countries, we are able to see new ways on attempting to facilitate and converge global developments exemplified by the FinTech Facilitation Office by the Hong Kong Monetary Authority.
Question 3 – Are banks trying to ride on technologies from smaller start-ups?
Several banks now in Malaysia are actively organising events for FinTech entrepreneurs and enthusiasts such as Hackathons – one individual raised the question of whether it is right to argue that banks only do so to “own” the intellectual property of the technology and to commercialise/benefit from it at a later stage.
Naysan and Sam strongly argued that they do not see it from financial institutions trying to own the technology. They see the partnership as an exit strategy for the start-up, and a way to scale up.
Question 4 – Is the Sandbox concept geared towards established players only?
The requirements in the Discussion Paper poses a challenge for start-ups at many stages, especially the infant and early-cycle ones, in terms of the high capital requirement and other funding needed to pay for expensive licensing fees etc.
The Discussion Paper’s provides clearly that the Sandbox is for serious players in the market. It is not meant for ideas but for products/solutions ready to go to market. Strictly looking at the definition, it does not preclude early-stage start-ups but these start-ups must adhere to the application requirements (especially many regulatory, governance and compliance ones) which might not be possible for early-stage start-ups.
Community Feedback Compilation by Next Money KL to Bank Negara Malaysia
1. New approach by regulators in supporting FinTech players
The fact that Bank Negara not only is actively encouraging FinTech entrepreneurs and developers to comment on this Discussion Paper, the concept of an “informal steer” in Para 1.5 demonstrates their willingness to engage with the industry and how they want to help.
It is definitely encouraging to see the regulators building collaborative groups such as the SC’s aFinity and BNM’s Financial Technology Enabler Group (FTEG) are a positive start in indicating the regulators’ proactive manner in introducing and advancing new technologies in Malaysia.
2. Urgency for the Start-ups
Start-ups are encouraged to continue to thrive and be collaborative even in heavily regulated environments. The laws and regulations can be amended in the future once the financial risks and challenges are identified.
Negative Opinions to take into consideration
1. The vagueness of the Discussion Paper
Some members of the audience voiced out their preference for more prescriptive rules from the regulators, or “tell us what you want”, rather than drafting very vague rules and faced multiple problems of legal interpretation during the application process.
2. Protectionism of the large and established financial institutions
The priorities of the Sandbox are disputed to be slanted to protect large financial institutions or collaboration between FinTech companies and banks. The Paper is seem to not favour small-sized entrepreneurs, especially ones with technologies or solutions that actually “disrupt” financial institutions and the financial industry. There is a strong need in the drafting to either clarify the rationale of such intentions; or better, to have different provisions to encourage smaller players to also join the Sandbox.
3. Regulators need to step-up
A shift in how regulators’ approach FinTech is needed to encourage the smaller, entrepreneurial players.
Suggestions from the Community
1. Vague definition of FinTech companies does not seem to extend to others interested parties such as Telecommunications companies who want to participate or develop their own payment systems
There is a need to perhaps widen or relook into the definition of a “FinTech” company and “financial institution” to cater for non-financial institution participating in developing financial technologies.
2. Harmonisation of regional laws
It would be ideal as well to see regional regulators working towards the harmonization of laws in the region to facilitate transfer and scaling up of FinTech products/solutions, as well as to promote Malaysia as the FinTech hub of Southeast Asia.
3. Role of Accelerators in the Regulatory Sandbox
Accelerators could address the gap between regulators and start-ups by playing a bigger role in the operating of the Sandbox. Accelerators are acutely aware of the challenges faced by start-ups and have the influence and connections to deliberate with regulators or financial institutions on such concerns from the ground and discuss possible solutions.
4. Protection of smaller FinTech companies in collaboration with financial institutions
Start-ups do want to work with banks and financial institutions, especially via Hackathons and other events, to take advantage of the institutions’ data etc. However, start-ups hope they are able to work with the bigger players without the worry of their intellectual property/ideas/solutions being taken away by such organisations. Perhaps the Sandbox could provide for more protection towards the smaller entrepreneurs.
The session ended with final remarks from the panelists, affirming start-ups to not give up and to continue to thrive and be collaborative even in heavily regulated environments.
The evening ended with a networking session between panelists and participants. Overall, the event was a success and hope that events like will not only forge a better relationship between regulators and FinTech entrepreneurs, but also to continue building a community that thrives of knowledge, learning and making an impact to the FinTech industry.