COVID-19 has impacted every aspect of our lives. Utilizing online services for bill payments, ordering of food and even grocery shopping has for some become a norm, as opposed to a convenience. Fintech, or financial technology, is what has made much of this possible. In Jamaica, it however remains accessible to only a privileged few. McKinsey Global Institute, in their 2016 report, “Digital Finance for All”, estimated that improving access to financial services could add US$3.7 trillion to the GDP of emerging economies by 2025. The report suggests that emerging economies, like some CARICOM member states, stand to gain the most, adding as much as 10% to 12% to their GDP. The message seems clear: we need fintech now, more than ever.
“Fintech” generally refers to technologically enabled financial innovation that results in new business models, applications, processes, or products with an associated material effect on financial markets and the provision of financial services. Fintech is not a new concept, however, the global regulatory landscape is still developing. In March 2020 the Bank of Jamaica (“BOJ”) issued a notice advising that the Guidelines for Electronic Retail Payment Services (“ERPS 2”) were being withdrawn with immediate effect and replaced with the Fintech Regulatory Sandbox Guidelines (the “Guidelines”), effective March 16, 2020. A foretelling of the deepening impact of the COVID-19 pandemic in Jamaica? Who knows!
The Guidelines are issued pursuant to the Payment, Clearing and Settlement Act and seem to cast a wider regulatory net than ERPS 2. Rather than being focused on activities defined as electronic retail payment services the Guidelines are applicable to a wider cross section of fintech services/products. The BOJ’s stated objective with the Guidelines is to provide a platform to encourage innovation in financial products and services, promote sustainable financial inclusion and competition while protecting consumers and mitigating risks associated with digital financial services.
Under the Guidelines, Regulated Entities and Fintech Companies who wish to offer payment services or other financial services will be allowed to operate in the sandbox upon satisfying the eligibility requirements. Regulated Entities include deposit taking institutions (“DTIs”), cambios, remittance service providers and securities dealers (on condition that the Financial Services Commission grants approval to the securities dealers to engage in Fintech activities). A Fintech Company is defined as a company other than a Regulated Entity that utilizes or plans to utilize fintech to provide financial services. Under the Guidelines “Fintech” refers to technological innovation to be utilized in the provision of financial products and services.
In order for a Fintech Company to be a participant in the sandbox, it must partner with a DTI. The Guidelines however do not expound on how this partnership should be structured.
In Jamaica, to become a participant of the sandbox, all applicants must demonstrate that their product or service is innovative, will benefit customer and country, does not fall under any other regulatory regime, that there is a need for sandbox testing and that it its ready for immediate testing. Applicants must have the necessary resources to support testing, including resources and expertise to mitigate and control potential risks and losses.
The testing period is for a maximum of 24 months, unless an extension is necessary to respond to specific issues or risks identified during initial testing. During the testing period the BOJ will ensure that certain safeguards for the protection of the public are put in place. These include client limits, financial liability exposure limits, consumer protection requirements, risk management controls including anti-money laundering and counter-terrorism readiness and monitoring. A participant in the sandbox will also be required to submit various pieces of information and reports to the BOJ.
On completion of the testing, the BOJ may approve the deployment of the product, service or solution to the market on a wide scale with specified conditions. Where the product, service or device is a payment service, non-DTI participants will be regulated by the BOJ. The BOJ may also prohibit deployment in the event of unsuccessful testing, based on agreed test measure(s) or where the product, service or solution is found to have unintended negative consequences for the public, the payment clearing and settlement systems, and / or financial stability.
Financial service is not defined under the Guidelines or the Payment, Clearing and Settlement Act, but if guidance is taken from the definition used in the Banking Services Act, this term may be taken to include banking business, lending, issuing electronic money, dealing in securities, portfolio management, insurance business and pension fund management. If you are considering launching a product such as a crowd funding platform, a payment tool or a robo-advising service where financial advice or online investment management is provided based on mathematical rules or algorithms, the Guidelines would be applicable to you. On a cursory read, the Guidelines might seem a bit vague or almost too general in its application. However, the language used and the seemingly “catch all” approach taken by the BOJ, is similar to that adopted by other regulators.
The United Kingdom, for instance, has a sandbox regime, with eligibility requirements similar to that of Jamaica. An applicant will need to show that they will deliver innovation that is either a regulated business or supports regulated business in the UK financial services market. Other requirements include the need to show that the innovation is ground-breaking or a significantly different offering in the marketplace; that the innovation offers a good prospect of identifiable benefit to consumers (either directly or via heightened competition); and that there is a genuine need to test the innovation in the sandbox. In the UK an applicant who is working with a partner, should disclose the role of the partner and the extent to which contractual agreements are in place.
In Malaysia, applicants for their sandbox must be financial institutions or fintech companies. Fintech companies may collaborate with other financial institutions (i.e. banks, remittance service providers and cambios) in order to gain added advantages from the guidance and support provided by these institutions with respect to regulatory requirements and risk mitigations. If the fintech company is not collaborating with a financial institution, in order to be eligible it must intend to carry on an authorised or registered business under their Financial Services Act (banking business) or a money services business under their Money Services Business Act (money changing and remittance business). Malaysia also has similar eligibility requirements to that of Jamaica i.e. the product, service or solution must be innovative and provide some benefit to the consumers or the Malaysian economy with regard to financing and investments.
In Canada, there is no one piece of legislation or single regulator which has jurisdiction over fintech companies. The regulation of fintech companies depends on the type of service being offered. If the service being offered falls within a regulated industry, for example insurance or securities, the regulator of that industry will have oversight of the fintech company. For example, the CSA Regulatory Sandbox is an initiative of the Canadian Securities Administrators (CSA) to support fintech businesses seeking to offer innovative products, services and applications in the Canadian securities industry. Their sandbox is open to business models that are innovative from a Canadian market perspective. Each business model is analyzed on a case-by-case basis. Businesses authorized to operate in the sandbox remain subject to all applicable regulatory requirements that may apply, subject to any exemptive relief granted. Registration and exemptive relief granted will be time limited, which is determined on a case-by-case basis. Other limits and conditions may be imposed to protect investors, including compliance and reporting obligations.
The main benefit of the sandboxes throughout these jurisdictions is to allow the participants to experiment or roll out their products and services under a more relaxed regulatory framework, but within a well-defined space and agreed duration. The BOJ’s approach is no different. They are casting a wide regulatory net, not to stifle innovation, but to encourage it, while ensuring the stability or our financial system.
Fintech developments give rise to greater competition, lower fees, faster and more efficient service, and financial inclusion for the unbanked and under-banked. We are fortunate to have a first-class regulator in the form of the BOJ. We certainly hope that the BOJ will be able to process sandbox applications in a timely manner and provide the necessary guidance to the public, given the growing need.
With each day that we battle COVID-19, no one knows what our new normal will look like. We can however guarantee that fintech will play an even larger role in shaping this new normal.
Simone Bowie Jones is a Partner and Shaniel May is an Associate at Myers, Fletcher & Gordon and they are members of the firm’s Commercial Department. They may be contacted via firstname.lastname@example.org, email@example.com or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.