As the Capital Markets Authority (CMA) awaits feedback from stakeholders by January 20, on the regulatory sandbox Policy Guidance Note (PGN), designed to facilitate innovation, a new dawn is set to be ushered in the capital markets.
Critical to the policy is the provision of an environment for testing of the innovation in a live environment but only on a limited scale.
The nexus between finance and technology, fintech (financial technology), is already taking root globally with expected disruption of current business models as the market landscape evolves.
Globally, some capital market jurisdictions have started embracing innovations such as: regtech (streamlining regulatory compliance by industry using technology), and suptech (strengthening supervision using technology); Artificial Intelligence (refers to simulated intelligence in machines programmed to think like a human being through traits such as learning and solving problems); and blockchain.
A blockchain, which is also known as distributed ledger technology (DLT), is a digital system that allows continuous updating and sharing of groups of data (also called blocks) which are linked by computers and secured using cryptography or writing using codes.
Considering the interconnectedness of the global financial markets, the impact of the emerging changes is likely to be felt in Kenya’s capital market sooner rather than later, noting Kenya’s established position as the global leader in mobile payment technology.
In anticipation of the shifting market dynamics, the CMA, the Australian Securities and Investments Commission (ASIC), and the Abu Dhabi Global Markets Financial Sector Regulatory Authority (ADGM-FSRA) respectively signed co-operation agreements in October 2016 and August 2017 to promote innovation in financial services in their respective markets, leveraging Kenya’s positioning in the region as an innovation centre. CMA continues to work closely with its peer regulators as well as the recently established International Organisation of Securities Commissions (IOSCO) Fintech Network to leverage best practices in addressing regulatory issues pertaining to innovation in financial services.
The publication of the consultation draft of the regulatory sandbox PGN is therefore a major milestone in the right direction. It is expected to facilitate the admission of fintech firms to a regulatory sandbox, as outlined in the CMA Strategic Plan 2018-2023. The PGN sets the eligibility, application, safeguard, and testing requirements for applicants.
A regulatory sandbox is a tailored regulatory environment which allows firms deploying innovative products, solutions and services to conduct live tests for their innovations within a limited scale in a “safe space”. The innovations to be tested should have the potential to deepen and develop Kenya’s capital markets.
The regulatory sandbox is intended to accelerate CMA’s understanding of emerging technologies and support evidence-based approaches to regulation that advance the goals of capital markets deepening and development; and investor protection in line with the 10-year (2014-2023) Capital Markets Master Plan.
The sandbox underpins CMA’s efforts to build capacity to respond to the impact and support the implementation of new technologies in the capital markets value chain. It is hinged on the regulator’s strategic objective of leveraging technology to drive efficiency in the capital markets value chain. There is an expectation that some of the innovations may be scalable to other parts of the financial sector such as banking, insurance and pensions, thus calling for closer coordination and collaboration among financial sector regulators in Kenya to ensure that such innovations obtain the requisite support.
The regulatory sandbox is designed to reduce time-to-market, potentially lower costs, improve access to finance, support more innovative products reaching the market while managing the adverse consequences of failure because of restricted client access.
The CMA has worked closely in this pursuit with Financial Sector Deepening Kenya (FSDK), who facilitated a landscaping study to establish the status, size and relevant fintech firms whose innovations are aligned to the authority’s regulatory sandbox initiative with the potential to revolutionize how financial products and services are offered and taken up. The findings from the study formed the basis upon which the PGN was developed.
By moving towards setting up a regulatory sandbox, the CMA will join a growing pool of peer regulators such as he United Kingdom Financial Conduct Authority, Australian Securities and Investments Commission, Monetary Authority of Singapore, Ontario Securities Commission and Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market that have established regulatory sandbox frameworks.
ANTONY MWANGI, head of corporate communications, Capital Markets Authority.