FinTech update: Saudi Securities Sandbox - the ExPermit

Saudi Arabia's Capital Markets Authority follows trend in Gulf states of announcing sandboxes to encourage FinTech innovation.

Raza Rizvi, Partner at Simmons & Simmons, and Suhaib Hammad, Partner at Hammad & Al-Mehdar in alliance with Simmons & Simmons, consider the most recent development in the Saudi FinTech landscape.

Saudi Arabia’s Capital Markets Authority (the CMA) has now followed the likes of Abu Dhabi Global Market’s Financial Services Regulatory Authority (FSRA), Bahrain’s Central Bank (CBB) and Dubai International Financial Centre’s Financial Services Authority (DFSA) by publishing guidance and enabling qualifying applicants to test their FinTech solutions in a lighter touch regulatory framework. On 10 January 2018, the CMA issued the “Financial Technology Experimental Permit Instructions” to enable successful applicants to benefit from the “FinTech ExPermit”. The guidance can be accessed here.

Although limited to securities activities rather than a broader range of financial services, this development reiterates the willingness of financial regulators in the region to tacitly accept the challenges that their regimes present for FinTech solution developers currently operating outside the regulated financial services sector.

The limitation of a testing licensing regime to securities activities was met with some disappointment in the Saudi market among the FinTech start-ups who were hopeful of a similar announcement from the Saudi Arabian Monetary Agency (the SAMA), in order to test a broader range of financial services and solutions.

Applicants looking to obtain the FinTech ExPermit do not need to be “Authorized Persons” and, as a sandbox, the new framework has many of the hallmarks seen in each of the FSRA and the DFSA’s equivalent regimes: for example, the CMA expects the applicant’s solution to be innovative, to agree to a pre-defined testing plan and commit to ongoing compliance particularly in relation to domestic laws concerning anti-money laundering and terrorism finance.

A key limiting feature of the various sandboxes now in place across the region is their jurisdictional scope. Only the CBB in Bahrain has a sandbox framework which extends across the entire nation and across a broad set of financial services. Many potential applicants realise that the scale required to progress towards a healthy, mature and fully regulated business is difficult to achieve where the relevant sandbox only allows testing to take place within its jurisdiction.

There is a sense that inter-regulator arrangements which enable the “passporting” of a licensed FinTech into another regulator’s jurisdiction would instil greater interest and attract higher quality solution providers. Given the multiplicity of financial services regulators, even in jurisdictions without free zones, such inter-regulator arrangements are seen as an important next objective which can only be achieved through sustained dialogue between the regulators. This seems practically possible, particularly where the regulators are part of the same national framework; a recent example has been the memorandum of understanding (MoU) between FSRA and the UAE’s Securities and Commodities Authority.

The emergence of sandboxes in the region suggests that there is a healthy level of alignment between regulators but whether this can extend to a meaningful passporting regime remains to be seen.

As each of the sandbox regimes gain traction and successful applicants progress with their testing mandates, it will also be interesting to see how many progress towards full regulation. While some applicants see their time in a sandbox as a stepping stone towards being acquired, a good measure of the success from a regulatory perspective would be to see if the sandboxes establish a glide path towards full regulation.

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