Building a digital ecosystem requires creating enabling policies and guiding local talent, in a bid to achieve this, the CBN recently released a Draft Framework for Sandbox Operations seeking to offer regulatory oversight for Fintech innovations, this issue brief highlights some regulatory concerns in the draft.
Issue-Brief | Ayodeji Oluwabusuyi
Fintech has established itself globally as an important component of the financial service sector due to its ability to create job opportunities, increase financial inclusion, and at the same time cut the number of the unbanked population. Nigeria has not been left out in the growth process. However, Nigeria ranks 52 in the global Fintech country rankings, and this amplifies the need to create an enabling Fintech ecosystem.
A step in creating this Fintech ecosystem requires enabling policies, guiding local talent, and removing roadblocks to allow digital businesses to trade freely. The fact that innovation always moves ahead of regulation poses a problem for both regulators and innovators, some countries have guarded this eventuality by establishing regulatory sandboxes as they provide a safe testing space for financial innovators while being closely monitored by the regulatory authority.
Following the steps of countries like the United Kingdom, Hong Kong, and Kenya, the Central Bank of Nigeria (CBN) recently released its Draft Regulatory Framework for Sandbox Operations, seeking to offer regulatory oversight for Fintech innovations, the draft covers several administrative and legal provisions including; eligibility requirements for prospective participants, documentary requirements for prospective firms, responsibilities of all participants in the Sandbox, among many others.
It is understood that the regulatory sandbox is only a draft however, some important legal concerns may raise curious considerations, and some of these concerns will be discussed.
The logic behind sandboxes is to create an environment where there are stimulation and understanding of innovation, in this case in financial services. It is inevitable that the nature of sandboxes will see several innovators presenting novel innovations to regulators to bridge the knowledge gap and understand its impact on traditional financial practices.
It is expected that in light of this concern the Draft should have espoused more on the recognition of intellectual property rights as a protective mechanism for the participating firms. Safeguards for intellectual property rights must be prioritized because sandboxes are always an avenue for innovators to showcase their innovation and perform live tests to determine the efficiency of the innovation the participants may have reasonable fears that their designs or technology may be leaked and become public knowledge or in some cases exposed to competitors.
This concern raises a valid issue which can be viewed from the perspective that the essential element for intellectual property protection is that sufficient effort has been expended on the making of the work to give it an original character. The problem participant may face with this is that they may be unsure as to the ingenuity of their work before a test of their innovation is made at the sandbox.
This uncertainty may be circumvented by an “expedited patent initiative” for Sandbox participants. The nature of the protection should be virtually the same with a standard patent holder and should enjoy the same rights however, only on a temporary basis. The success or otherwise of the innovation will determine whether the patent or design eventually becomes permanent.
Consumer Protection and Scope of Liability
This concern may seem argumentative but the nature of a sandbox requires live testing of products/innovation which invariably can only be aided by the public. Although Paragraph 7.0 of the Draft provides for customer safeguards, it only does this in order to try and understand the nature of the risk which customers may face in the event such innovation successfully moves on from the sandbox phase which a consensus can be made that this is purely futuristic.
Also, Item IX of Paragraph 7.0 of the Draft requires the participants to obtain customers’ prior written consent to the participation in the test but it is unclear whether this should serve as an indication that the participants are exculpated from liability in the event of any issue which arises during the sandbox process. There should be clarity on the scope of liability of participants in the sandbox if any, so they know what they are getting into and also a mechanism for redress if possible.
A regulatory sandbox was first introduced in Nigeria by a private organization; Financial Services Innovators (FSI) in 2019, an initiative that was backed by the Securities and Exchange Commission (SEC) and the Nigerian Inter-Bank Settlement Systems (NIBSS). The CBN as the apex financial services regulator in Nigeria perhaps took the cue and rolled out its Draft Regulation for Sandbox Operations subsequently.
The issue this presents is one of hierarchy as nothing in the Draft seems to clarify the legal status of the CBN proposed Sandbox vis-à-vis other existing sandboxes or future sandboxes in the financial sector. In a bid to understand the significance of the issue, reference must be made to the proposed SEC sandbox which offers a safe space where startups can test innovative products relating to the capital market operations in a live environment without immediately satisfying all regulatory requirements. Although SEC regulates a distinct but interconnected sub-sector in the financial scheme of things, the CBN still remains the apex body. This issue must be interrogated in order to avoid uncertainty across all the financial sub-sectors, mutual recognition should be given to all sandboxes across the financial subsectors to avoid diminishing the importance of the process.
Transparent Selection Criterion
Paragraph 1.2 of the Draft points out that products already rejected by the regulators or the Federal Government will be ineligible for presentation in the sandbox trials. This is a departure from the rationale behind a sandbox process, sandboxes should naturally offer free-testing for innovators in a controlled environment. The question of whether any of the prospective participants have been rejected previously should not necessarily create a barrier as a clean slate is expected to be offered for participants. A transparent selection process and a mechanism for exercising the right of appeal against previous rejection should be provided so as not to restrict the innovative process.
This concern may seem rather inconsequential but in the long run, may turn out important. The Draft does not make any provision for the mechanism for resolving any dispute which may arise from the process. It seems the drafters do not envisage any form of dispute but where there are duties and responsibilities involved in any commercial engagement the possibility of a dispute is rather likely than not. It will make for prudent legislation if a grievance redressal process is provided. In this case, an Alternative Dispute Resolution mechanism will be more suited to resolving any issues or grievance which may arise between participants or between participants and regulators.
Still a Draft
It is understandable that the regulatory sandbox is still a draft proposal, it remains to be seen if the Draft will be implemented in its current form or it still undergoes significant modifications before it is set rolling. It is commendable that the apex regulatory financial body has opted for a regulatory sandbox. However, it is of critical importance to ensure that certain legal omissions do not hinder or stifle the utility in the sandbox process. Furthermore, the sandbox will be properly utilized if technical expertise meets regulatory flexibility in order to further evolve the sector. As such regulators should ensure that appropriate legal safeguards are incorporated in the Draft to protect the interest of both the participants and the public at large.
This issue brief was provided by
Ayodeji Oluwabusuyi | Research Analyst, Start-Ups, Business, Jobs | firstname.lastname@example.org
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