MFSA Rule 3 – The MFSA FinTech Regulatory Sandbox

The MFSA has launched the MFSA FinTech Regulatory Sandbox (‘the Sandbox’) during a press conference held on the 22nd of July 2020. It is applicable to all FinTech Service Providers and FinTech Suppliers.

The Sandbox, as established by Rule 3 (‘Rule’) of the MFSA Act (Chapter 330 of the Laws of Malta) provides for a regulatory environment within which FinTech operators may test their innovative solution for a specified period of time within the financial services sector, under certain prescribed conditions.

The Sandbox implies certain definitions, including:

‘FinTech’

• Being technologically-enable financial innovation that could result in new business models, applications, processes or products with an associated material effect on financial markets and provision of financial services.

‘FinTech Service Provider’

• A person who is duly licensed or otherwise authorised to provide or who intends to provide a service/s requiring a license or other authorisation in terms of applicable financial services legislation currently in force in Malta and who utilises FinTech in his/her operations.

‘Fintech Supplier’

• A person who provides or intend to provide a FinTech Solution (a specific utilisation of FinTech) which does not require any authorisation whatsoever.

In addition, the Sandbox’s objectives are very clear – supporting financial innovation, ensuring regulatory certainty and promoting knowledge sharing. These objectives can be further classified into 4 categories:

1 - Innovation - The Sandbox provides a suitable regulatory environment for the introduction of new business models, applications, processes and products to operate within the financial services market.

2 - Sustainability - The MFSA will closely monitor participants in order to ascertain the true value of the innovations offered whilst ensuring customer/investor protection, market integrity and financial soundness.

3 - Certainty - The sandbox will provide legal security in relation to the financial services market as it provides the involved personnel and entities with power to determine the necessary and appropriate requirements as per law.

4 - Knowledge - An opportunity for the MFSA to enhance its capacity in regard to the regulatory implications and gaps of FinTech Solutions.

Interested applicants can submit their proposal to the authority at any time they deem appropriate. The MFSA may, at its discretion, and at any stage request addition information it deems necessary.

Also, in order for a person to successfully apply to the Sandbox, said person must prove that the solution being offered is innovative and may be beneficial. In addition, it must also be ready to be tested and their must also be the need for testing.

The abovementioned characteristics must be proven by the applicant in the ‘Proposal Stage’ which is the first stage out of six. Within this stage, the applicant provides a detailed description of the solution and testing commences (against a fee of €500). The second stage, - the ‘Selection stage’ – advises whether the applicant may proceed to the third stage or not.

In the third stage – ‘Application Stage’ – one has to differentiate between FinTech Service providers and FinTech suppliers. If the service provider is already licenced or authorized by the MFSA under any financial services law in Malta and the proposed Solution falls within the ambit of such licence or authorisation, then the applicant is required to apply for a variation of the licence or authorisation.

On the other hand, if the Applicant is not so licensed or authorised – he/she is required to seek authorisation in accordance to the current financial services regulations enforceable in Malta. Needless to say, if during the Sandbox lifecycle, the FinTech supplier is carrying out any activity that requires a licence or authorisation, such person is required to seek a licence or the necessary authorisation first and has to immediately suspend such activity until said authorisation is acquired.

Moving on, the next stage – ‘Testing Stage’ – here the Participant has to confirm and provide stability and regularity in the delivery of the solution, while also implementing

measures to protect the interest of the client. It must also be mentioned that an early termination may also occur and in such case the participant will move on to the next stage – ‘Evaluation Stage’ – the participant is expected to draw up and submit a report to the MFSA. Said report shall comprise information related to the performance of the solution, whilst specifying its intended exit strategy or in the case where the participant does not indicate an early termination, then a request to extend the testing period to 6 or 12 months can be made.

The last stage – ‘Exit Stage’ – at the end of the process, the participant shall then either commence the exit strategy as agreed upon with the MFSA during the application stage or continue its operations within the Sandbox.

The MFSA will be publishing a list with all the names of the participants.

About the Author

This article has been authored by Bjorn Camilleri, CSB Group Legal Trainee. For any additional information or support required please contact us on [email protected].