What is a regulatory sandbox?

A regulatory sandbox is a regulatory approach, typically summarized in writing and published, that allows live, time-bound testing of innovations under a regulator’s oversight. Novel financial products, technologies, and business models can be tested under a set of rules, supervision requirements, and appropriate safeguards.

Benefits of a regulatory sandbox

United Nations Secretary-General’s Special Advocate explains some of the benefits of a regulatory sandbox below:

• A sandbox creates a conducive and contained space where incumbents and challengers experiment with innovations at the edge or even outside of the existing regulatory framework.
• A regulatory sandbox brings the cost of innovation down, reduces barriers to entry, and allows regulators to collect important insights before deciding if further regulatory action is necessary.
• A successful test may result in several outcomes, including full-fledged or tailored authorisation of the innovation, changes in regulation, or a cease-and-desist order.

ADGM RegLab

The ADGM RegLab is a specially-tailored regulatory framework which provides a controlled environment for FinTech participants to develop and test innovative FinTech solutions. As the first RegLab in the region and the world’s second most active FinTech sandbox, the RegLab is designed to foster innovation within the UAE financial services market for both new market entrants and existing financial institutions.

By creating a regulated, safe environment RegLab has been designed to allow FinTech innovation to be tested without being subjected to the full suite of regulatory requirements that would otherwise apply to traditional financial services firms. The set-up will allow FinTech participants to explore and develop FinTech solutions in a risk appropriate and cost-effective environment.

Application process

Application and submission to the ADGM RegLab is done in cohorts. ADGM publicly announces when it starts accepting applications for the next cohort. The ADGM Reglab is for all participants active in the FinTech space, from start-ups to existing, regulated companies.

To qualify, FinTech participants must demonstrate an innovative technological solution at a stage of development, ready for testing. The solution should also contribute to the development of the financial sector in the UAE.

Innovation Testing Licence (ITL) Programme

Dubai Financial Services Authority (DFSA) has created its own regulatory sandbox, known as the DFSA Innovation Testing Licence (ITL) Programme, which enables ITL holders to test new and innovative financial products, services and business models.

The Innovation Testing Licence (ITL) Programme is DFSA’s version of a regulatory sandbox that provides a controlled environment within which ITL holders can test and develop their innovation products and services. As it is a licenced-sandbox, applicants must apply to DFSA and complete an authorisation process. The first stage of the process involves submitting an application for consideration. The second stage involves submitting an application for DFSA’s authorisation to operate within the ITL Programme.

ITL’s objectives

The Innovation Testing Licence (ITL) Programme aims at:

1. maintaining regulatory objectives
2. providing a controlled environment to test innovative financial products and services
3. providing a gateway to innovative market participants
4. enhancing supervisory understanding.

Regulatory sandbox for the insurance sector

The Central Bank of the UAE deployed their regulatory sandbox as one of the initiatives in the insurance sector, in response to the rapid developments in the digital technology that are transforming the economic and financial landscape, as well as, creating opportunities and posing challenges for the insured, policyholders, beneficiaries, affected stakeholders, companies, related professions and regulators. These developments are mostly led by the private sector, driven by the global digitisation and technological development forces that are re-shaping numerous aspects of the world's economies and societies.

The Central Bank of the UAE, Insurance Sector, issued Sandbox Regulation to define the regulatory framework for the operation and management of the experimental environment of the insurance sector. The document aims to:

1. understand the products to be introduced and identify the risks associated with them and to ensure a satisfactory level for customers during the pilot period
2. transform the UAE insurance market into a smart insurance market
3. support the emerging Emirati FinTech companies
4. create an attractive environment for the insurance sector using innovative systems, as well as making it a platform to interact with FinTech companies, improving the regulatory framework, and contributing to economic growth and risk management.

Read FAQs relating to Sandbox Regulatory Framework of Central Bank of the UAE.

Related links from WAM:

• ADGM announces launch of digital sandbox to accelerate financial services
• DFSA welcomes Regulatory Sandbox 2020 Summer applications
• DFSA accepts four FinTech firms in its regulatory sandbox Summer Cohort
• ADGM RegLab attracts record number of applications for its 3rd cohort