The Bangko Sentral ng Pilipinas (“BSP”), in Circular No. 1153, series of 2022, approved the adoption of the Regulatory Sandbox Framework (the “Framework”). The Framework has institutionalised the “test-and-learn” approach that the BSP has been implementing over the years, and endeavours to achieve a more active, evidence-based, and results-driven assessment of new and emerging financial solutions. It enables participants to explore developing technologies without materially risking financial stability and significantly harming the consumers.

What is the Regulatory Sandbox Framework?

Regulatory Sandbox refers to a controlled, time-bound, live testing environment, which may feature regulatory waivers at the BSP’s discretion. The testing environment may involve limits or parameters within which participants may operate.^[1] The sandbox approach provides “safe spaces” for fintech companies to test new products and services without prompting the typical regulatory or licensing requirements. The BSP has expressed that by taking this approach, it will be able to strike a balance between reaping the rewards of innovation while mitigating its possible risks to the public.

Sandbox Oversight Team as the governing body

The BSP will create a Sandbox Oversight Team (“SOT”), which shall act as the central point of contact overseeing various stages of the sandbox implementation. The oversight activities of the SOT include the implementation of the regulatory sandbox and its guidelines, evaluation of applications, and provision of technical advisory or assistance to the participants.

Eligibility criteria

Participation in the Framework is open to all BSP-Supervised Financial Institutions (“BSFIs”), third-party service providers of the BSFIs, other BSP-registered institutions, and new players that intend to offer or use an emerging or new technology^[2] to deliver financial products or services pertaining to activities that could fall under the regulatory purview of the BSP.

In addition, the applicants must meet certain criteria^[3] to be able to participate in the regulatory sandbox. For instance, the participant’s financial solution must either (1) use new and emerging technologies or utilise an existing technology in an innovative manner, or (2) bridge a market gap in the delivery of financial products and services. Moreover, the applicant must demonstrate its capability to deploy the proposed solution, provide an initial test plan, identify significant risks as well as key performance indicators, and provide an acceptable exit and transition strategy once the experimentation is completed regardless of the outcome.

The four-stage process

Each regulatory sandbox shall undergo a four-stage process, which can ensure that all applicants are assessed according to the established criteria. The four stage-process involves: application, evaluation, testing, and exit stage:

• the application stage is where the applicant submits its intent to participate in the sandbox;
• at the evaluation stage, the BSP will assess the documents submitted by the applicant as to completeness, correctness and suitability based on the eligibility criteria. Eligible participants will proceed to the next step, while those who do not meet the criteria may file a new application after a cooling-off period of six months from the release of the result of the BSP’s evaluation;
• the testing stage is where the participants will determine the viability of their proposed products or services through testing and experimentation. The testing can run from three to 12 months from the go-live date;
• the exit stage is where the BSP will evaluate the experimentation and testing of the solution.

At the end of process, the BSP will decide whether or not the sandbox activities were successful and determine which products or services are fit for public consumption. If so, the participant should formally submit to the BSP an application to operate the product or service that was subjected to the sandbox activity.

Alternatively, applicants may opt to use a simplified approach known as the Regulatory Sandbox Lite. This simplified approach generally runs on a shorter period and aims to fast track the testing period of the regulatory sandbox process. This option, however, is available only to BSFIs to ensure that the financial products and services that will be subject of this lite approach are already within the scope of existing regulations.

Implications for business

To foster innovation in the financial services market, an open-minded and supportive approach balanced with adequate regulation should be adopted by public authorities. The Framework is a manifestation of this approach, demonstrating BSP’s more sophisticated and forward-looking disposition while keeping the consumers’ protection and interests in mind.

The sandbox approach provides BSP-regulated institutions and new players a live test environment wherein potential risks are contained. This is consistent with the BSP’s policy of enabling an environment for responsible innovation to promote the development of an inclusive digital ecosystem that is complemented by a sound risk management system.^[4] “After all, the sandbox approach is often founded on the notion that a progressive, dynamic, and sometimes out-of-the-box regulatory paradigm is needed to encourage, rather than stifle, the development and adoption of innovative financial technologies.”^[5]

If you have any questions or require any additional information, please contact Felix Sy, Reeneth B. Santos, and Geia Barrido of Insights Philippines Legal Advisors (a member of ZICO Law).

This alert is for general information only and is not a substitute for legal advice.

[1] Appaya, Sharmista, et. Al The World Bank Group 2020, Global Experiences from Regulatory Sandboxes as cited in BSP Circular No. 1153, series of 2022 (Sep. 5, 2022).

[2] A new or emerging technology that supports the delivery of financial products and services may include the use of artificial intelligence/machine learning, internet-of-things, 5G, cloud computing, robotics process/business automation, quantum computing, or decentralised ledger technologies, among others.

[3] Applicants should meet the following criteria to be able to participate in the regulatory sandbox:

1. The financial solution:
   1. uses new or emerging technology or utilises an existing technology in an innovative manner. The applicant shall provide justification (e.g., business case/market research) that shall support the mentioned characteristics in the proposed solution; or
   2. bridges a market gap in the delivery of financial products and services. This shall be supported by research that shall be part of the documents submitted to the BSP;
2. The applicant must demonstrate its capability to deploy the proposed solution through a roll-out plan or strategy;
3. The applicant shall provide an initial test plan, which includes test case scenarios and expected outcomes of experiment;
4. The applicant must be able to identify significant risks, including money laundering and terrorist financing risks, IT and cybersecurity, data integrity and data privacy, market acceptability, consumer protection, and project implementation/execution, relevant to the innovation and the corresponding proposed safeguards and risk mitigation strategies;
5. The applicant must be able to identify key performance indicators or other metrics in monitoring the progress of the pilot implementation; and
6. The applicant shall provide an acceptable exit and transition strategy once the experimentation is completed regardless of the outcome.

[4] BSP Circular No. 1153. series of 2022 (Sep. 5, 2022).

[5] RAFAEL ANGELA M. PADILLA, FINTECH LAW AND FIRST PRINCIPLES 6 (2020, ed.).