CBUAE Sandbox: A Launchpad for Financial Innovation

Introduction

The Central Bank of the UAE (CBUAE) has introduced the Regulatory Sandbox as a tool to support and regulate innovation in the financial sector. This initiative allows participants to test innovative financial products, services, and business models in a controlled environment without requiring a license. The sandbox provides a defined space and timeframe where participants operate under the Central Bank's supervision, ensuring compliance with regulatory standards and protection for stakeholders. By engaging with an assigned case supervisor, participants can understand regulatory impacts and ensure their innovations meet the necessary requirements. The goal of the Regulatory Sandbox is to foster innovation within the financial services industry by offering a safe space for start-ups, established businesses, and technology companies to experiment and refine their offerings.

Regulatory Sandbox Framework

The Regulatory Sandbox is designed for individuals or entities wishing to test their business, products, or services that involve Licensed Financial Activities. However, it is not available for:

• Deposits: Taking deposits of all types.
• Insurance Activities: Carrying out insurance activities within the UAE.
• Principal Financial Products: Acting as a principal in financial products affecting financial positions, such as foreign exchange, financial derivatives, bonds, sukuk, equities, commodities, and other financial products as determined by the CBUAE.

Licensed Financial Institutions are excluded from participation. Any innovative testing beyond their authorized activities must be pre-approved by the CBUAE. The CBUAE will work with applicants to assess their innovative solutions or business models on a case-by-case basis, identifying applicable legal and regulatory obligations throughout the participant's time in the Sandbox.

Target Applicants

Entities eligible to apply for the Regulatory Sandbox include:

• UAE-based Start-ups and Established Companies: Regardless of whether they are regulated by authorities other than the CBUAE.
• Companies in Financial Free Zones: Subject to the applicable legal framework.

Applicants must serve the UAE financial services market and/or be UAE citizens.

Eligibility Criteria

Applicants must meet the following criteria:

1. Product/Service Requirements:

• Related to financial products/services impacting the CBUAE’s objectives or involving licensed financial activities.
• Innovative in technology use or application.
• Beneficial to consumers or the financial services industry (e.g., promoting growth andefficiency, mitigating risk).
• Demonstrates a genuine need for testing and an intention to deploy in the UAE post-testing, complying with all regulatory requirements.

2. Ongoing Compliance Requirements:

• Meet financial soundness requirements as determined by the CBUAE.
• Ready for live market testing with real consumers.
• Willing to deploy the innovation broadly post-testing.
• Possess relevant technical, technological, and business knowledge and expertise.
• Maintain a UAE-based bank account if required.
• Ensure key personnel meet 'Fit and Proper' requirements relating to integrity, competence, financial solvency and legal capacity.
• Obtain valid, clear and written consent from consumers to participate in the experiment. Consumers must be fully informed of the potential risks associated with their participation, including financial risks. Consent forms must explicitly state that participants will not be protected under the Consumer Protection Regulation.?

3. Application Information:

The following information shall also be provided with the application:

• Defined test scenarios and expected outcomes.
• Comprehensive operational readiness and testing plan that defines key milestones, a timeline, and likelihood of achieving target outcomes.
• Defined exit and transition strategies for market wide launch.
• Structured plan for regular reporting including metrics and analysis.
• Client acquisition and communication strategies.
• Robust wind-down plan.
• Risk assessment and mitigation strategies for consumers and the financial market.
• Clear disclosures on testing objectives, compensation, and risks applicable to consumer participants.

Application Process

The application is a three-stage process:

1. Preliminary Stage:

The CBUAE reviews the application and provides potential suitability feedback within 15 working days upon receipt of complete information for the assessment. The notification of potential suitability does not guarantee admission to the Regulatory Sandbox.

2. Evaluation Stage:

The CBUAE engages with the applicant to determine necessary adjustments and safeguards for the application. The applicant must subsequently demonstrate how these will be implemented. This stage lasts up to 21 working days.

3. Decision Stage:

• A final decision is rendered within 15 working days of resubmission of the application.
• Rejected applicants will receive an explanation of the reasons for the rejection decision and may reapply within 6 months after addressing the stated issues.?
• Approved applicants must inform their consumers that their financial services or products are subject to the CBUAE Regulatory Sandbox framework.

Safeguards

The CBUAE has identified consumer protection and financial system stability as the core areas of focus for mitigating risks associated with innovative financial technologies. Notably, participants must implement the following minimum safeguards:

• Adequate mechanisms for consumer complaints, compensation, and dispute resolution communicated to the participating consumers.
• Segregation of consumer funds/assets from the participant’s funds in escrow accounts.
• Data protection and management measures.
• Obtaining express and informed consumer consent.
• Ensuring the on-going fitness and propriety of individuals involved.
• Measures against money laundering and terrorism financing.

Exit Routes

Participation in the Regulatory Sandbox may end in two scenarios:

1. Expiry of the Testing Period:

• The participant must submit to the CBUAE a report prior the end of the testing period. The CBUAE will specify the report’s content and submission deadline.
• The CBUAE will review the report to determine if the participant can apply for a license for market-wide deployment.
• If the participant is deemed ineligible, the participant must cease activities and fulfill specific obligations. These include, inter alia, notifying consumers of the testing termination, fulfilling all its obligations to consumers (including compensation), reporting to the CBUAE on the implementation of the exit strategy (at such intervals and in such manner agreed with the CBUAE), and securely disposing of consumer information.

2. Discontinuation of Testing:

• Testing may be terminated if it does not meet the intended purposes, risks which cannot be mitigated during the testing phase outweigh the benefits, requirements imposed by the CBUAE are breached, or the participant decides to exit at its own discretion or the testing period lapses.
• As indicated above, participants must adhere to their defined exit strategy, inform consumers of the testing termination, fulfill their obligations, report to the CBUAE on the implementation of the exit strategy and securely dispose of consumer information.

Regulatory Sandbox Duration

In principle, the testing period lasts between 6 to 12 months. Extensions are considered on a case-by-case basis.?

Participants seeking an extension must submit a formal request to the CBUAE including a detailed justification, at least 30 calendar days prior to the testing period’s expiration.

Testing and Reporting

Participants must submit interim reports including:

• Performance indicators and milestones;
• Key issues and operational incident reports;
• Compliance with regulatory safeguards; and
• Actions taken to address key issues.

A CBUAE representative will participate in meetings and review periodic reports to assist with licensing preparation.

Financial Implications

Participation in the Regulatory Sandbox does not incur regulatory fees.

Conclusion

The CBUAE’s Regulatory Sandbox provides a valuable opportunity for financial innovation by allowing participants to test and refine their products and services in a controlled environment under CBUAE regulatory oversight.?

By adhering to the outlined framework, eligibility criteria, and application process, participants can benefit from the Central Bank's guidance and support, and understand market dynamics. Most importantly, this iterative approach fosters consumer protection, financial inclusion and industry development.?

Concurrently, the CBUAE gains valuable insights into emerging risks and technological advancements. This knowledge informs regulatory framework development and enhances the CBUAE’s capacity to oversee innovative financial services.