The Philippines recognizes the need to calibrate its regulatory policies to encourage the entry of new and emerging technology and to foster an innovative mindset among key stakeholders in the technology sector.
To incentivize innovation in the financial sphere, Philippine authorities have adopted regulatory sandboxes that aim to provide businesses in the financial sector with a well-defined, controlled space to “play” with their novel ideas, products, services, and other FinTech initiatives. Through a sandbox approach, innovators are permitted to test new business models while allowing regulators to supervise and control the risks accompanying the innovation in a limited but dynamic environment.
As early as 2004, the Philippine Central Bank, the Bangko Sentral ng Pilipinas (BSP), has been espousing the Test-and-Learn Approach, a regulatory sandbox approach created to increase innovation within the financial services industry and, ultimately, to promote financial inclusion among Filipinos. In adopting the approach, the BSP is likewise guided by three principles – 1) ensuring that regulation is risk-based, proportionate, and fair, 2) maintaining active multi-stakeholder collaboration, and 3) ensuring consumer protection.
Five key steps are followed by the BSP in implementing its regulatory sandboxes: First. Allow the market to develop and for innovations to take place. Second, proceed with flexibility yet with caution. Third, understand the operating and business model. Fourth. Adopt the appropriate regulatory approach. Lastly, we closely monitor developments and related issues.
Guided by the foregoing principles and steps, the BSP is able to set the stage for financial innovation. By allowing financial startups to enter the market and to provide the services that incumbent financial institutions cannot provide and in places they cannot reach, the BSP’s goal of financial inclusion is being attained.
The Test-and-Learn Approach was first used for e-money when the concept was just being introduced in the Philippines. The BSP allows non-bank institutions to pilot-test frameworks for e-money businesses within defined parameters and in close coordination with the BSP.
On March 9, 2009, or five years after the first pilot-test, the BSP’s monetary board issued BSP Circular No. 649, which is the first circular providing the guidelines on the issuance of electronic money and the operations of electronic money issuers in the Philippines. Considering this a welcome development, the BSP has since used the Test-and-Learn Approach for financial startups and other innovations within the financial sector.
Another successful pilot study placed in a regulatory sandbox and supervised by the BSP was done pursuant to the agreement between the Asian Development Bank and Cantilan Bank, Inc., to test a cloud-based core banking technology in 2017. The pilot test was successful and its findings served as a guide for the BSP in updating its regulations and internal processes.
Aside from the BSP, another regulatory body in the Philippines espousing regulatory sandboxes is the Insurance Commission (IC).
In a fairly recent circular dated June 14, 2020, the IC laid down guidelines on the adoption of a regulatory sandbox framework for insurance technology (InsurTech) innovations. Interestingly, IC Circular Letter No. 2020-73 provides a thorough definition of a regulatory sandbox –
“a controlled environment with a system set up by a licensed insurance provider in collaboration with another person, natural or juridical, licensed or not by the IC, that allows a small scale and live testing of technical innovations operating under special circumstances/s, allowance/s, and/or other limited and time-bound supervision.”
Moreover, the IC Circular Letter categorically sets forth the requirements and processes for applying to participate in a regulatory sandbox. It also provides for how regulatory sandboxes should be conducted, i.e., in experimentation cycles approved by the IC and with a maximum period of one year, extendible by six months. Likewise, worth noting is the requirement that all InsurTech firms must obtain the IC’s approval prior to the implementation of any regulatory sandbox.
Other notable provisions of the circular are the 1) application screening parameters which include innovative ideas, insurance inclusion, consumer benefit protection, readiness for testing and soundness of exit plan; 2) mandatory submission of monthly written reports to the IC; and, 3) penalties for violation of the circular. At first glance, the circular appears to be geared towards addressing the potential risks posed by regulatory sandboxes upon consumers while also promoting the adoption of InsurTech.
The adoption of new technologies should be accompanied by novel regulatory approaches. As innovation accelerates, new review systems and approval requirements should be as dynamic. We have seen how sustained collaboration among stakeholders succeeds in fostering innovation and inclusion in the Philippine financial sector. Collaboration, not competition, is key. Regulatory authorities in the Philippines and elsewhere should strive to maintain the balance between public interest and protection on the one hand, and digital transformation on the other, in arriving at successful policy outcomes for the FinTech sector in particular and the financial industry at large.
Kashmere P. Duran is a junior associate at Gorriceta Africa Cauton & Saavedra, forming part of its Corporate, Technology, and Litigation Departments of the Firm. A member of the Philippine Bar since 2019, Kashmere received her Bachelor of Laws (Ll.B) from San Beda University-Manila. Her practice includes assisting clients in data privacy registration and compliance, copyright infringement, and advising upon general technology law.
Edsel F. Tupaz is a partner at Gorriceta Africa Cauton & Saavedra. Mr. Tupaz’s practice focuses on the nexus of law, policy, and technology. He studies the global regulatory environment for digital assets and advises upon legal frameworks for blockchain-based technology initiatives, digital asset offerings, smart contracts, and virtual currency business initiatives. Before joining Gorriceta, Mr. Tupaz was a senior public official at the Department of Public Works and Highways of the Republic of the Philippines. A dual-qualified lawyer accredited under the Philippines and New York Bar, Mr. Tupaz is a legal adviser to Fortune 500 and Nasdaq 100 companies, along with many of the largest and most impactful technology companies in Southeast Asia. Edsel holds a Masters in Law from Harvard Law School in Cambridge, Massachusetts, and a Juris Doctor and a Bachelor of Arts in Economics from the Ateneo de Manila University. He studied FinTech and blockchain technologies at the Massachusetts Institute of Technology.
Suggested citation: Kashmere P. Duran and Edsel F. Tupaz, Regulatory Sandboxes: Initiatives for Innovation and Inclusion in the Philippines, JURIST – Professional Commentary, September 07, 2020, https://www.jurist.org/commentary/2020/09/duran-tupaz-regulatory-innovation-philippines/.
This article was prepared for publication by Vishwajeet Deshmukh, a JURIST staff editor. Please direct any questions or comments to him at commentary@jurist.org
