CMA Stakeholders’ Consultative Paper

August 29, 2018 - Reading Time: 4 minutes - By Mutindi Muema


The Capital Markets Authority (CMA) Stakeholders’ Consultative Paper on Policy Framework for Implementation of a Regulatory Sandbox to Support Financial Technology (“Fintech”) Innovation in the capital markets in Kenya (“Fintech Regulatory Sandbox Policy Paper”) seeks to introduce the concept of a Fintech regulatory sandbox in Kenya.

It provides the background and rationale for a regulatory sandbox for fintech innovations for the Capital Markets (“FintechCM”) and a global outlook on the adoption of the Regulatory Sandbox for Fintech. Notably, while the regulated services may differ from one jurisdiction to the other, the Regulatory Sandbox has been adopted in the United Kingdom (the “UK”), Australia, Malaysia, Singapore, Abu Dhabi, Indonesia and Hong Kong, among others.

The proposed scope of the regulatory sandbox for Kenya is for it to be a tailored framework that allows firms deploying innovative technology in the financial services sector to conduct their activities in a controlled and cost-effective environment.

The benefits of such a “relaxed” framework would include: reduced time to market at potentially lower cost; better access to finance; more innovative products reaching the market; contained consequences of failure; and reaching the best solution for the customer.

In preparing this Fintech Regulatory Sandbox Policy Paper, the CMA notes that it has: jointly with other stakeholders, prepared a policy advisory paper on approach to crowdfunding oversight for the East African region; engaged with ICT business incubators; and engaged with other regulatory authorities and international standard setting bodies such as the Financial Stability Board.

The CMA’s initiative is worthy to be applauded. It is hoped that it will ignite more collaboration among all the regulators of financial services in respect of fintech such that the framework is expanded to cover all innovative fintech solutions and help Kenya augment its position as Africa’s most nurturing environments for financial innovation.

Scope of Application

Notably, and a fact which is appreciated by the CMA, the impact of fintech has been more pronounced in other financial services sectors such as money remittance, insurtech, payments and e-money issuance, than in the capital markets.

Nonetheless, the CMA has highlighted the following FintechCM that could benefit from the proposed regulatory sandbox: regtech, big-data, artificial intelligence and investment tech, distributed ledger technology (blockchain technology), cryptocurrency and peer to peer finance (also referred to as crowdfunding).

Given that most financial services are not exclusively regulated by the CMA, the Fintech Regulatory Sandbox Policy Framework proposed by the CMA would be limited to fintech companies developing solutions for CMA’s existing licensees or authorized institutions or solutions by CMA’s existing licensees or authorized institutions.

Proposed Regulatory Sandbox Models

From the Fintech Regulatory Sandbox Policy Paper, the CMA has considered 4 regulatory sandbox models and highlighted their features, benefits and shortcomings.

The relevant models are as follows:

Industry-led Models

  • Virtual Sandbox – this would be an environment to enable firms to test their solutions virtually without entering the real market. An example of a virtual sandbox could be a cloud-based solution set up and equipped in collaboration between the industry, which businesses could then customize for their products or services, run tests with public data sets or data provided by other firms through the virtual sandbox, and then invite firms or even customers to try their new solution. In this environment, there would be no risk of consumer detriment, risk to market integrity or financial stability while testing. A virtual sandbox could be used by all innovators regardless of the size or whether they are authorized or not. CMA is of the view that this model would work best if introduced by industry (noting that a large number of firms already have similar testing technologies although they mostly operate separately from each other and with data only from the owners of these sandboxes), but the CMA would facilitate collaboration between interested parties and provide support when the virtual sandbox is being developed.
  • Sandbox Umbrella – this could be a not-for-profit company set up by industry to act as a sandbox umbrella that allows unauthorized innovators to offer their services under its shelter as appointed representatives. The umbrella company would need to be authorized with appropriate permissions and then supervised by the CMA as other authorized firms. The umbrella company would monitor its appointed representatives. Innovators would not have to apply for authorization and meet authorization requirements in their own right. The umbrella company would assess whether the firms applying to become appointed representatives are ready to test their solutions. 

CMA-led Models 

The CMA is considering which of the two models below it should adopt for its regulatory sandbox:

  • Developing a regulatory sandbox as a new regulated activity – this approach would see CMA create a sandbox regime (with new authorization requirements and rules) that would be flexible and in line with in-principle approaches to regulation. The CMA would do this through the development of a Policy Guidance Note to facilitate introduction of a regulatory sandbox into the market. This approach could allow for a streamlined authorization process and potentially less regulatory requirements to comply with when testing. The drawbacks to this option are that firms would still need to become authorized before being able to test, and it would not apply to activities that are not regulated under the Capital Markets Act (e.g. payment services, e-money and insurance services). Thus, this change could have a limited effect.
  • Amending the waiver test contained in specific sections of the Capital Markets Act –Under this approach, the CMA could consider changing the waiver conditions in the Capital Markets Act (if need be) to make it easier to waive rules for a firm within the sandbox. This could be achieved by introducing a new test for sandbox firms. Under this approach, waivers would enable firms to test concepts before ensuring compliance with all relevant rules (firms can start testing quicker). On the downside, the CMA’s power to issue waivers is limited to the provisions of the Capital Markets Act. Legislative changes would be necessary to broaden the scope for waivers; legislative changes take significant time and resource to introduce. This approach would similarly require the CMA to develop a Policy Guidance Note to facilitate introduction of a regulatory sandbox. 

High Level Comments on the Proposed Regulatory Framework

The CMA’s proposed regulatory framework has adopted the essential features of the regulatory frameworks being used in the UK, Australia, Malaysia, Singapore and other jurisdictions. The proposed regulatory framework sets out the following steps: the application process, acceptance and progression, operationalization, exit strategy, expiry of approval and revocation of approval. The proposed regulatory framework is generally in line with the current best practices. However, the table below contains comments on sections that could be improved by the CMA in drafting the Policy Guidance Note:

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