Regulatory Sandbox Framework Document

 

I. Definitions

Fintech: new technologies that relate to the financial industry, and aim to improve and develop the financial activities including launch of advanced products, services and business models in the financial services industry.

Sandbox: A safe space that allows for experimentation with innovative products and services relating to FinTech without incurring the cost of obtaining official licenses. The environment caters for either products and services that are based on, or relevant to, electronic payment of funds that require the Central Bank of Kuwait’s approval prior to their launch in the local market, or the other innovative products and services that are based on new or innovatively applied technology.

Proposed Product/Service: Innovative FinTech products/services that are based on, or relevant to the electronic payment of funds, or the other innovative products and services that are based on new or innovatively applied technology.

The Applicant: Any company or individual(s) applying to CBK to participate in the Regulatory Sandbox for the purpose of testing a proposed financial product or service. Cooperation with a third party for this purpose is allowed.

The Participant: An applicant that has been granted approval by the Central Bank of Kuwait to participate in the Regulatory Sandbox to start the technical and operational testing of the proposed product or service.

Soft launch: The process of launching the proposed product or service to a specific group of volunteer customers in the local market.

Initial Approval: The approval issued by the Central Bank of Kuwait to start the soft launch.

Volunteer Customers: The customers who participate in the soft launch and are fully aware of potential risks.

Final Approval: The approval granted by the Central Bank of Kuwait to deploy the proposed product or service in the local market.

II. Introduction

  • In line with the Central Bank of Kuwait (CBK) efforts to introduce appropriate policies and regulations to promote advanced products, services and business models in the modern financial services industry, this Regulatory Sandbox Framework has been issued to commensurate with the instructions regulating the electronic payment of funds (*). Such efforts support the innovative initiatives in a manner that serves the national economy and provide opportunities to the providers of the innovative products and services to introduce their innovations in line with a methodology that does not jeopardize the stability of the financial and banking system.

(*) Regulations issued on 30/9/2018 under Law No. 20/2014 concerning Electronic Transactions.

III. Objectives

  • The main objective of the Regulatory Sandbox Framework is to enhance CBK’s role in adopting and promoting innovation by temporarily exempting participants of certain requirements pertaining to either the implementation of the regulatory instructions or obtaining licenses. Along with providing an appropriate controlled environment for testing the proposed products and services, the Regulatory Sandbox also provides numerous benefits to the participant. Most significant benefits include enhancing efficiency in understanding and complying with regulatory requirements, improving risk management skills, receiving technical advisory, and, finally, ensuring the participants’ competitiveness by:

A. Reducing both the time-cycle needed to launch the proposed product or service in the local market and any potential cost.

B. Facilitating the testing of the proposed product or service before deploying it in the local market.

C. Enabling cooperation between innovators and CBK in order to facilitate complete compliance with all regulations relevant to deployment of the proposed product or service.

IV. Scope

  • The Regulatory Sandbox Framework targets both companies and individuals striving to provide innovative FinTech products or services that are based on, or relevant to, electronic payment of funds, or the other products and services by using a new or innovatively applied technology.

V. Stages of the Regulatory Sandbox

  • The maximum duration to complete all stages of the Regulatory Sandbox is specified as one year, with possibility of extension, at CBK’s discretion. Applicants/participants wishing to exit the Sandbox during any stage are to officially notify CBK in writing, specifying justifications and clarifications. The CBK has the right to reject any subsequent applications by the same applicant/participant for a period of one year, from the date of the official notification. The stages of the regulatory Sandbox are as follows:

  • Application Stage:

    The Regulatory Sandbox application form is to be filled in and submitted, along with the required documents, as per the guidelines stated on the Regulatory Sandbox page on CBK’s website.

    Once submitted, CBK shall review the application to verify its compliance with all requirements and that the proposed product or service falls within the scope of the Regulatory Sandbox Framework. The applicant will be informed of CBK’s decision either to approve or reject the application, which is based on the following eligibility criteria:

A. Local deployment and Innovation: The request must be regarding the launch in the local market of a product or service that is based on, or relevant to, the electronic payment of funds, or the other innovative products and services that are based on new or innovatively applied technology. Priority shall be given to the innovative products and services.

B. Product/Service Applicability: The product or the service should be applicable and does not contravene the regulations applicable in the State of Kuwait. In addition, the related risks should not be high.

C. Value Proposition: The proposed product or service must provide benefits to both the customer in particular, and the market in general, as follows:

Customer benefits: providing the service or product to the customer at a lowered cost, ensuring enhanced performance and execution, offering higher safety standards, while improving efficiency and quality through introducing the product or service in an innovative manner.

Market benefits: Achieving market growth and efficiency of the local market by promoting effective competition and providing risk management solutions.

D. Readiness to Test: The proposed product or service must be in an advanced stage of development indicating it is ready for testing. As such, the following must be prepared:

A complete testing plan that includes clear and well-defined objectives, parameters and standards to ensure successful implementation.

A volunteer customer protection plan that provides the necessary guarantees and appropriate compensation if necessary.

An assessment report of the emerging risks from the proposed product or service, and the necessary measures to mitigate them.

E. Deployment Plan: A clear plan must be prepared for the proposed product or service to be deployed once final approval is granted by CBK. The plan should include an implementation timeframe for local market deployment.

  • Evaluation Stage:
    In this stage, the application will be evaluated thoroughly from all technical, security and regulatory aspects related to the proposed product or service. The duration of this stage will depend on the level of complexity of these aspects. On completion, the applicant will be notified of the results, whether to move ahead to the next stage of the Regulatory Sandbox or not.

  • Experimentation Stage:
    At this stage, CBK, in collaboration with the participant, shall initiate a technical, safety, and operational testing of the proposed product or service in the appropriate controlled environment provided for this purpose. Testing will include measuring the level of compliance with CBK’s regulations, verifying that adequate security measures are embedded within the proposed product or service and that customer confidentiality and privacy standards are upheld, as well as measuring operational efficiency. Simulations may be necessary via CBK banking systems’ controlled environment, as an extra measure to ensure the integrity of the system. The scope of testing is to be determined on a case-by-case basis. Participants are required to fully commit with the testing process and submit the reports required by CBK. At the end of the testing stage, CBK will determine whether or not to move the participant to the next stage.

  • Accreditation Stage:
    At this stage, CBK will either grant final or initial approval, or reject the proposed product or service. 

First: Final Approval:
• The Central Bank of Kuwait gives its final approval for the products and services that are based on electronic payment of funds as a product or service licensed to be launched in the local market. The participant will be officially notified of the approval, and is required to observe the following:

A. Compliance with all relevant CBK regulations, particularly those related to electronic payment of funds.

B. Obtaining all licenses required virtue of laws enforced in the State of Kuwait.

• For the products and services that are not based on electronic payment of funds, the participant shall be informed of obtaining a certificate of a product or services tested within CBK Regulatory Sandbox Framework on the condition that the participant should obtain all the required licenses in accordance with the legislation applicable in the State of Kuwait, and comply with the product or service related instructions and regulations.

Second: Initial Approval:
• The participant will be notified by CBK of the initial approval, and is required to comply with measures pertaining to a soft launch of the proposed product or service to the volunteer customers. The participant is required to inform the volunteer customers of potential risks related to the proposed product or service, set adequate risk mitigation measures for their protection, and ensure customer data protection measures are set in place. A precise scope for the participation of the volunteer customers is to be agreed upon between the participant and the volunteer customers on a case-by-case basis.

• The participant may request an extension of the soft launch duration. The CBK may approve or deny the request as it deems fitting.

Upon the completion of the soft launch, and after providing CBK with the results, the subsequent decision will be one of the following:

A. Granting the final approval of the proposed product or service, virtue of which the participant is required to comply with section (First: Final Approval) of this document.

B. Reverting the proposed product or service to any of the previous stages of the Regulatory Sandbox.

C. Rejecting the proposed product or service.

Third: Rejection:
CBK will officially notify the participant of the decision to reject the proposed product or service.