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An Introduction of Taiwan "Financial Technology Development and Innovation Experiment Act" (Regulatory Sandbox)

Sienna Huang/Powei Huang


The rapid development of Fintech makes it difficult for laws and regulations to catch up with the speed of the development of business models and technologies, and controversies often occur when laws and regulations do not meet the actual needs.  In an attempt to avoid the situation in which dated laws and regulations hinder innovative technology and business models and hence contribute to the loss of development opportunities, there comes the concept of "regulatory sandbox," a secured scope which is subject to a certain degree of control of competent authorities.  Within this secured scope, limitations of laws and regulations can be excluded, and the testing of innovative products, services and even business models can be embarked upon.  What's made possible in the above is in close interaction and collaboration with supervisors so as to drive further revision of relevant laws in accordance with the results of experiments.  The establishment of a regulatory sandbox mechanism aims to foster the startup Fintech industry.

 

The Financial Conduct Authority of the United Kingdom took the lead in implementing the concept of "regulatory sandbox" as early as 2015.  Subsequently, Singapore, Australia and Hong Kong also made similar plans in succession.  On December 29, 2017, Taiwan's Legislative Yuan passed the third reading of the "Financial Technology Development and Innovation Experiment Act" (hereinafter referred to as the "Fintech Innovation Act"). Although the accurate provisions have not yet been announced by the president, the Fintech Innovation Act aims to establish a secured environment for innovations and experiments in financial technology according to the draft materials adopted at the 15th meeting of the 4th Session of the 9th Legislative Yuan members on December 29, 2017.  With this act, applicants can develop innovative financial products or services, promote financial inclusion and drive for further breakthrough in financial technology.  Meanwhile, financial consumers and those who participate in innovation experiments (the "participants") will be fully protected by this act.  In addition to being the fifth country to have an official system of regulatory sandbox, Taiwan will be the first country to introduce the mechanism of regulatory sandbox into legislation.

 

The Fintech Innovation Act stipulates that the competent authority responsible for the administration of the regulatory sandbox is the Financial Supervisory Commission ("FSC") according to the current information, relevant reports and press release by the FSC on December 29, 2017.  The applicant shall be a natural person, a sole proprietorship or a partnership enterprise or a legal person under certain conditions.  The period of innovation experiment is limited to one year and can be extended for one time to the maximum of six months.  If the innovation experiment involves the law for further amendment, then the times of extension for such project shall not be limited, but the whole term shall not exceed 3 years.  When approving the innovation experiment, the FSC shall disclose, among other relevant information, the name of the applicant, the content of the innovation experiment, the period and scope of the innovation experiment, and the laws, regulations, statutory orders and administrative rules that are excluded from the innovation experiment.  In one month from the expiration date of the innovation experiment, applicants shall submit the results of the innovation experiment to the FSC.  The FSC shall solicit experts, scholars and relevant agencies to evaluate the result.  If the result shows that the experiment has merits of innovation, enhances the efficiency of financial services, reduces costs, or benefits the financial consumers, the FSC will take into account the handling of such innovation experiments, actively review and discuss the revision of financial laws and regulations, offer assistance for start-ups or strategic cooperation, and provide start-up counseling services from relevant agencies.  The FSC will also take into account the needs of individual cases and exclude the application of the criminal and administrative liabilities in specific financial laws and regulations within the scope of innovation experiments after consulting the relevant ministries.

 

For applicants, innovation experiments carried out in the regulatory sandbox often represent chances and business opportunities for future technological development.  Applicants shall measure the nature, approach, result and intent of the innovation experiments as early as possible, deploy and make plans for relevant intellectual property rights in advance, flexibly employ different systems of patents, trademarks, trade secrets and copyrights, and tailor the most suitable forms of protection for themselves.  Other approaches such as licensing can also be adopted by the applicants for further promoting the value of innovation.  During the application and implementation of the regulatory sandbox, due diligence shall be exercised in judging the degree of disclosure in view of the requirements of different intellectual property rights such as the novelty of patents and the secrecy of trade secrets.  In addition, the applicant shall be mindful of the arrangement of ownership of the intellectual property lest future disputes occur on the allocation and authorization of rights, which may result in the loss of key business opportunities.

 

On the other hand, participants are exposed to higher risks since regulatory sandbox is intrinsically designed to transcend the scope of the current laws and regulations.  The Fintech Innovation Act also offers several protective measures in this regard.  For instance, the act explicitly stipulates the applicant’s liabilities to the participants, which the applicants shall not restrict or exempt themselves from in advance.  The applicants shall also provide participants with appropriate protective measure and measure of exit from the innovation experiment.  The scope of the innovation experiments, rights and obligations, and related risks shall be clearly defined in the contract.  If any civil dispute should occur, the relevant provisions of the Financial Consumer Protection Act may apply mutatis mutandis to the participants and enable them to make appeals to the applicants and institute an ombudsman case to the Financial Ombudsman Institution in order to safeguard the rights and interests of the participants.

 

Regulatory sandbox allows exemption for applicants from certain current laws and regulations during specific period and within certain scope, and henceforth the flexibility for innovation experiments.  The act undoubtedly offers a boon for Taiwan in the exploration of multiple possibilities for the development of financial technology.  Still, the main points that should not be neglected also include the proper use and maintenance of the result to the advantage of its value, the audit and control of regulatory sandbox, and protection of Participants.  For the time being, the Fintech Innovation Act has not yet been formally promulgated by the president, and the relevant supporting measures have not been formulated and implemented by the FSC either.  Therefore, the effectiveness of future implementation remains a topic for further investigation.

 


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