The Bangko Sentral ng Pilipinas (BSP) will institutionalize its regulatory sandbox by coming up with a “test and learn” framework for startups and innovators to experiment with new financial products and services in a controlled environment.

A draft circular that sets the guidelines and parameters of a BSP regulatory sandbox is currently being circulated to all banks and non-banks for comments and suggestions. The feedback deadline is Feb. 28.

BSP Governor Benjamin E. Diokno said in the draft circular that it is BSP’s objectives to enable an environment for “responsible innovation to promote the development of an inclusive digital financial ecosystem that is complemented by sound risk management system.”

“In this light, the Bangko Sentral has welcomed transformative and game-changing technologies over the years under the ‘test and learn’ approach. The institutionalization of this approach through the adoption of the regulatory sandbox framework aims to promote a more active, evidence-based, and results-driven assessment of new and emerging financial solutions,” said Diokno.

Regulatory sandbox refers to a controlled, time-bound, live testing environment, which may feature regulatory waivers at the regulators’ discretion. The testing environment may involve limits or parameters within which firms must operate.

The proposed regulatory sandbox framework will apply to all BSP-supervised financial institutions (BSFIs) including third-party service providers and new players that will offer financial solutions.

Based on the draft circular, these financial solutions will follow set criteria such as new or emerging technology or that it will utilize an existing technology in an innovative manner. The applicant should also have market research, must demonstrate its capability to deploy the proposed solution through a pilot roll-out plan or strategy and provide an initial test plan, which includes test case scenarios and expected outcomes of the experiment, among others.

The BSP is also offering what it called alternative regulatory approaches for BSFIs. This will cover applicant BSFI that will either proceed with innovation testing following established licensing regime or to proceed to “regulatory sandbox lite”.

The BSP defines traditional processing as proposed innovations within the scope of existing regulations while a regulatory sandbox lite is a “simplified approach available to BSFIs to encourage digitalization and/or participation in the electronic offering/delivery of financial products/services that are already within the scope of existing regulations.”

The sandbox lite is an approach that “intends to accelerate the end-to-end process of the testing period and is generally shorter compared to the entire regulatory sandbox process.”

“Regulatory requirements and expectations that will be temporarily lifted shall be identified by the Bangko Sentral on a case-by-case basis, taking into account the merits of the proposed activity as well as the associated risks,” according to the draft circular.

The BSP is likewise proposing an oversight framework to form or designate units within the central bank to be called “Sandbox Oversight Team” to oversee the various stages of the sandbox activities.

Meantime, there will be a four-stage process in the operational guidelines to each regulatory sandbox such as application stage, evaluation, testing, and exit stages.

The BSP’s sandbox experimentation has always had strong consumer protection, data privacy and data protection elements.

In the draft circular, the BSP said participants should adopt measures to protect the rights and interests of consumers in implementing sandbox experimentation to ensure that customers are well-informed and protected in availing of the product being tested. “Customers should be informed that the product or service being offered is under the regulatory sandbox platform and that their availment is part of the pilot implementation,” said the BSP.

BSFIs not only need to ensure customers are informed of all the possible risks associated with the product as well as possible implications, but that there will data sharing in the experimentation process.

“All customers participating in the experimentation should be informed that they own the data being collected and processed through the transaction, and that they have all the rights enumerated under Philippine data privacy laws” which is Republic Act No. 10173 or the Data Privacy Act of 2012, said the BSP. The use of customer data is limited to “the boundaries of the consent the customer provided in availing the product or service” in the regulatory sandbox, added the BSP.