A nine-member group constituted by pension regulator PFRDA has come out with a raft of recommendations, which if implemented, would see National Pension System (NPS) forge deeper ties with the use of fintech. The NPS already utilises a completely digital architecture. fintech has a great potential to help improve communication with subscribers, engagement with the broader public, make internal processes of intermediaries more efficient, improve their risk management and regulatory compliance processes.
In order to speed up the development of the NPS market and for improving the ease of doing business in relation to NPS, PFRDA is in the process of undertaking steps to identify the areas under NPS which could utilise the financial technologies (fintech) using the regulatory sandbox approach for the benefit of subscribers and NPS as a whole.
Accordingly, PFRDA had constituted a group in November 2018 to identify areas under NPS which could utilise fintech through Regulatory Sandbox. The committee has submitted its report on 3rd April 2019.
Listing out 10 areas where fintech applications may be useful for NPS, the group has talked about the onboarding process, paperless pension account generation, compliance to Know Your Customer/Due Diligence and prevention of money laundering.
In the area of transactions, fintech could impact the flow of contributions from subscriber through banking channels to Pension Funds, subsequent investments, and credit in pension account near to real time.
In investments, the group has talked about fintech use in robo advisory/artificial intelligence for enabling informed choices by subscribers (fund manager/assets/switches) as per risk appetite/profile. It has talked about the adoption of algorithm trading by pension funds, real-time settlement of trades, the market valuation of investments, etc.
FinTech applications could also be found in the areas of record-keeping such as a change in subscriber data, recording payment of contribution and unitisation (exploring use of blockchain/distributed ledger)
Discussions on compliance of PFRDA Act and Regulations (RegTech) and supervision of intermediaries and analytics (SupTech) also came up.
The group has recommended that only those fintech applications that fall solely within the remit of PFRDA should be allowed to apply. Inter regulatory applications should be kept out of the purview unless the requisite permissions from other regulators are already in place. This ensured no friction between different financial regulators.
Sandbox regulations/guidelines may also allow for suitable relaxations in other regulations/ guidelines/ internal orders etc. for a limited period for the sole purpose of the sandbox with approval of the competent authority. The group recommended a three-tier governance structure — Board, PFRDA Sandbox Implementation & Evaluation committee and Regulatory Sandbox department.
In the Information Technology field, Sandbox is a closed testing environment designed for experimenting safely with web or software projects. The concept of Sandbox is also being used in the financial service sector and is referred to as Regulatory Sandbox. Regulatory Sandbox provides a testing ground for new business models and applications that are not necessarily covered by or compliant to current regulations.
A regulatory sandbox environment would provide a safe and secure test environment for fintech companies to execute their ideas and their innovations. It is a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms which may not have been possible to achieve outside this sandbox due to regulatory considerations. The sandbox environment would provide suitable safeguards to ensure the experiment is limited and does not result in an industry-wide contagion.
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The Reserve Bank of India had set up an inter–Regulatory Working group in July 2018 to study the issues relating to fintech and Digital Banking in India. PFRDA was one also of the member of the group.
IRDAI also set up a committee to look into the modalities of setting up an individual Regulatory Sandbox. The committee has already floated a consultation paper. The GOI and Government of Maharashtra have also been engaged with regulators and Industry bodies for setting up the Regulatory sandbox.