The Securities and Exchange Commission (SEC) has introduced the SEC Strategic Sandbox through SEC Memorandum Circular No. 9, Series of 2024 (Circular) dated 25 April 2024, enabling firms to delve into innovation, test their products or services in a real-world setting, and adopt new technology to further develop the financial markets. It also facilitates collaboration among regulators, innovators, and other stakeholders in formulating regulations and policies that are supported by actual data for emerging technologies.
A Regulatory Sandbox is defined as a “regulatory tool that will enable a sandbox participant to test its innovative product or service or a new business model in a live and controlled environment, within a specified period.” Once admitted to the Regulatory Sandbox program, qualified participants may be granted regulatory relief, subject to the conditions found in the implementing guidelines. This regulatory relief has a defined duration, as fixed in the Sandbox Participant’s approved testing plan.
The SEC shall list eligible activities and innovations on its website that are permitted to operate within the Regulatory Sandbox. Interested Sandbox Participants whose proposed activities or innovations do not entirely align with those in the list may still submit their applications, subject to further evaluation by the SEC.
Prospective Sandbox Participants must demonstrate the following to the SEC with supporting information:
- The proposed financial product or service includes new or emerging technology or uses existing technology in a novel way, addresses a problem, or brings benefits to consumers or the overall financial markets, or any other description of innovation;
- The applicant must clearly identify that the financial product or service is not prohibited by law in the Philippines, and why the enrollment to a regulatory sandbox is appropriate and necessary;
- The entity has the intention and ability to deploy the proposed financial product or service in the Philippines on a broader scale after successfully exiting the sandbox, if business objectives have been met and if approved by the management of the Sandbox Participant;
- The entity has the capacity and is ready to test the financial product and service with actual consumers in a controlled environment;
- Description of the source of funds;
- A testing plan with test scenarios and expected outcomes of the sandbox experimentation should be clearly defined;
- The entity must provide Key Performance Indicators or other metrics in monitoring the progress of the sandbox implementation;
- Appropriate limitations and conditions are clearly defined, for the sandbox to be effectively executed while sufficiently protecting the interest of consumers and maintaining the safety and soundness of the industry, including, but not limited to:
– Profile of target customers for the sandbox and the requirement to assess their suitability prior to availing of the financial product or service; and
– Any limitations in individual and total investment amounts that may be accepted;
- Significant risks arising from the proposed financial product or service are assessed and mitigated, as well as the entity’s safeguards to assess and mitigate these risks; and
- An acceptable exit and transition strategy should be clearly defined in the event that the proposed financial product or service has to be discontinued or can proceed to be deployed on a broader scale after exiting the sandbox.
All sandbox testing under the purview of the SEC requires the approval of the SEC En Banc. Upon such approval, the sandbox is launched into the experimentation testing stage and the financial product or service may be offered to the Sandbox environment. The Sandbox Participant is required to adhere strictly to the approved testing plan. At the end of the testing period, the sandbox is deemed terminated.
The SEC could terminate the sandbox at any stage of the process for reasons which may be determined by the SEC En Banc, such as:
- The continued offering of the product or service is inimical to the interest of the investors or the investing public, due to lack or failure of investor protection measures;
- SEC is not satisfied that the sandbox will achieve its intended purpose based on the latest test scenarios, expected outcomes, and period mutually agreed with the sandbox entity;
- The Sandbox Participant is unable to fully comply with the relevant legal and regulatory requirements at the end of the sandbox period;
- A flaw has been discovered in the financial product or service under experimentation where the risks posed to customers or the financial system outweigh the benefits of the financial product or service under experimentation, and the Sandbox Participant acknowledges that the flaw cannot be resolved within the duration of the sandbox;
- The Sandbox Participant breached any condition imposed in the approved testing plan for the duration of the sandbox; and
- The Sandbox Participant expressed its decision to exit the sandbox at its own discretion.
The graduated Sandbox Participants may formally submit to the SEC an application for the required license to offer the financial product or service to the public at large. During the transition period, the SEC will provide guidance and support in navigating potentially new regulatory requirements to ensure the sustainability and scalability of the Sandbox Participants’ innovative product and/or service.
In summary, the main objective of this Circular is to foster genuine innovation aimed at enhancing efficiency, preventing fraud, promoting financial inclusion, and ultimately improving the lives of the Filipino people.
For further details, a copy of the Circular may be accessed through SEC’s website.
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