Regulatory sandbox: SECP allows six tech-based business ideas to operate

ISLAMABAD: The Securities and Exchange Commission of Pakistan (SECP) has started experience of innovative business solutions by allowing six tech based business ideas to operate under its technology driven initiative of regulatory sandbox.

The SECP officials told Business Recorder here on Wednesday that the SECP’s regulatory sandbox provides companies with the ability to test new solution sets for regulations which currently do not exist.

The products and business models approved by the Commission for live testing include digital insurance, digital platform for mutual funds, Robo-advisory and crowd funding.

Approved applicants will be allowed to operate in a controlled environment for a period of up to six months, in accordance with the conditions and limitations imposed on applicants.

The SECP spokesperson said that SECP believes that testing of technology-driven solutions through Regulatory Sandbox can stimulate financial and technological innovation and broaden the range of financial products for increasing the financial inclusion in the country. This initiative will also supplement the SECP’s vision of enhancing financial inclusion and promotion of FinTech and InsurTech sectors in its regulated domain.

The first solution that the SECP approved was a Sharia-compliant digital insurance company (Takaful) for personal lines (individual not companies). This covers all types of insurance other than natural life. The digital insurance will transform the entire sector by providing instant claim solutions and easy procedures.

The concept of digital insurance is already successfully experienced in developed countries.

The complete insurance solution from buying and selling a policy to depositing of premium and claim will be provided digitally on phone, SMS, and email.

This includes automated settlement of claims.

The second solution approval was for a digital insurance broker.

Unlike the Takaful, the brokerage sandbox approval is for personal lines. The insurance broker, like the digital insurance company, will acquire customers digitally on behalf of insurances companies.

Based on prior agreements with insurance underwriters, claims will be paid in real-time through a mobile wallet or a bank account. The digital broker is expected to assist traditional underwriters to become digital. The third solution approved was for equity crowdfunding.

Our current laws make this a criminal offence. However, under the sandbox environment, the SECP is experimenting to assess market demand.

After the six-month trial period, the SECP is expected to go to the Parliament to get this law changed.

They maintained that the equity crowdfunding is very popular in both developed as well as emerging markets.

It allows a start-up to raise its funding from investors in small denominations as opposed to from venture capital (VC) or private equity firms.

Pakistani startups need this medium of funding as the VC channel is not deep enough. The caveat is that emerging markets may not have investors with enough experience of start-up funding, which is a high-risk-high-reward equation.

Eligible investors will have to be prequalified and this investment opportunity will not be rightly available for everyone.

The fourth solution approved is peer-to-peer debt funding that allows borrowers to bypass banks and go directly to individual lenders.

The solution is a platform where pre-lenders scored (without liability) by the platform are introduced to lenders.

This program was initially immensely successful in the United States and China. However, in both countries due to an inadequate regulatory environment abuses took place.

As a consequence, regulators in both countries are revisiting their regulations.

In China, the largest peer-to-peer lender Ant Financial Services is now obliged to retain some of the risks of default as opposed to just being an introductory platform.

The fifth and sixth solutions deal with investments.

From a financial inclusion lens, the penetration of investment products such as mutual funds is very limited.

The general public has a material lack of awareness, and until recently, the process of investing for individuals was very convoluted.

The approvals are for a robo-advisory and a centralised online platform for mutual funds. At the end of the testing period, applicants shall submit a comprehensive report to the Commission for sharing the overall results and statistics, which will then determine the future course of action for these innovations.

This process will assist in bringing new and beneficial technology products for the end users to the market, the SECP officials added.

Copyright Business Recorder, 2020