INTRODUCTION

Through a circular dated April 28, 2023, the Nigerian Securities and Exchange Commission (SEC) has announced that it is now accepting applications for its Regulatory Incubation (RI) program for fintech firms and companies seeking to operate in the Nigerian capital market. This call for applications comes after SEC introduced the Regulatory Sandbox in 2021, which is aimed at providing a controlled environment for fintech firms to test their innovative products and services.

The Regulatory Sandbox, which is part of the RI program, offers Fintechs an opportunity to demonstrate their solutions without running afoul of existing regulations, paving the way for a smoother path to market. By allowing Fintechs to operate in a sandbox environment, SEC is fostering a culture of innovation and entrepreneurship while ensuring that market integrity and investor protection are maintained. With the RI program, SEC is supporting the growth of the fintech industry in Nigeria, which has the potential to revolutionize the financial sector and drive economic growth.

The Playground of Innovation: Exploring Regulatory Sandboxes

A Regulatory Sandbox is a framework that allows innovative businesses to test their products, services, and business models in a controlled environment under the supervision of a regulatory body. The Sandbox is designed to provide a safe space for innovative companies to experiment with new ideas, processes, and technologies without being subject to all of the regulatory requirements that would ordinarily apply to their operations. This allows companies to assess the viability of their innovations and make adjustments before deploying them on a larger scale. The Sandbox also enables regulators to monitor the testing and determine the appropriate level of regulatory oversight necessary to protect consumers and ensure market stability.

Examples of regulatory sandbox programs in the Western Bloc include the UK’s Financial Conduct Authority (FCA) sandbox, the Monetary Authority of Singapore’s (MAS) fintech regulatory sandbox, and the Consumer Financial Protection Bureau’s (CFPB) Project Catalyst in the United States. In Africa, some countries have adopted regulatory sandbox programs, such as Kenya’s Capital Markets Authority (CMA) regulatory sandbox and of course, the Nigeria’s Securities and Exchange Commission (SEC) Regulatory Incubation program. These programs have been instrumental in driving innovation in the fintech industry and supporting financial inclusion in their respective countries.

THE SEC’S REGULATORY INCUBATION PROGRAM

The SEC regulatory sandbox program seeks to accomplish a number of important goals. First and foremost, it aims to encourage an incubation phase that allows for innovation inside the financial sector. The program promotes the creation of cutting-edge technology and business models by offering a controlled environment for testing novel concepts, goods, and services. 

Second, the SEC is dedicated to protecting investors and preserving market integrity. The sandbox program’s rules are created to find a balance between encouraging innovation and defending the interests of investors. This action was expected because the Commission has previously issued a number of directives to try to control the quickly growing business. The SEC is aware that regulatory incubation could be a practical strategy for enabling regulations to develop alongside the industry and its quickly evolving technology.

The Regulatory Incubation program will operate by admitting identified Fintech business models and processes in cohorts for a one-year period. Participation in the RI program will encompass an Initial Assessment Phase and the Regulatory Incubation Phase. The categories to be admitted into each cohort will be determined based on submissions received through the FinTech Assessment Form and communicated ahead of each take-off date.

Eligible Participants

1. Registered Capital Market Operators.
2. Unregistered FinTech innovators that require regulation.
3. FinTech Firms of all sizes.
4. Special interest in firms that want to enhance investor participation in the Nigerian Capital Market.

It is important to note that Crowdfunding platforms, Robo Advisory/Digital Investment Advisory Platforms, and Sub-broker Serving Multiple brokers using a digital platform cannot apply for the regulatory sandbox program

To apply to participate in the Regulatory Incubation Program, Fintech firms have to meet the following requirements and demonstrate that their innovation:

1. Is for application in the Nigeria Capital Market;
2. Is safe for investors;
3. Is genuine innovation that introduces a new product/process to serve specific investor needs;
4. Is able to solve existing compliance or supervisory issues (optional);
5. Is ready for testing.

Following the commencement of the application process, the SEC has indicated that it would receive applications through its dedicated portal from 28th April 2023 until 26th May 2023 when it would close the process and the cohorts will be announced at specific times.

The SEC explained that the RI Program is designed to address the needs of new business models and processes that require regulatory authorization to continue carrying out full or ancillary technology-driven capital market activities. The RI Program has therefore been conceived as an interim measure to aid the evolution of effective regulation which accommodates the innovation by Fintechs without compromising market integrity and within limits that ensure investor protection.

MODUS OPERANDI

The RI Program will last for a period of one year to enable SEC to supervise some new models of providing capital market services in a limited form before it becomes fully established to operate. During the one-year period, the businesses will operate under some prescribed basic but limited provisions which are contained in the Guidelines. Before an entity applies for the RI Program, the Guidelines specify that the entity must:

1. Utilize innovative technology to introduce a new product or service, or implement innovation to an existing financial product or service;
2. Engage in, or seek to engage in, financial activities in Nigeria that fall under SEC’s regulatory purview;
3. Be prepared to launch with active customers and operate within the confines of the SEC Regulatory Framework;
4. Register as soon as the rules governing the RI Program are issued by SEC;
5. Provide a product or service that addresses compliance or supervision issues or provides potential benefits to Nigerian Capital Market consumers;
6. Ensure that the product is secure for investors;
7. Fill out the FinTech Initial Assessment Form and discuss your proposal with SEC at an early stage.

A. INITIAL ASSESSMENT PHASE

Entities that meet pre-qualification requirements will move to the Initial Assessment Phase for fintech products or services. During this phase, the entity must fill out the FinTech Initial Assessment (FIA) Form and pay a processing fee of N200,000.00. The SEC will respond to the FIA Form within 15 working days. 

If there is a regulatory framework in place for the proposed product or service, the SEC will provide guidance. If not, the applicant must submit a Regulatory Incubation (RI) Form within 16 working days, along with an Implementation Plan for the product or service.

Once an applicant submits the Regulatory Incubation (RI) Form, the SEC will respond within 20 working days to confirm admission to the RI Program, admission at a future date, or decline of the application. After passing the Initial Assessment Phase, the applicant will receive a Letter of Admission from the SEC and must commit to certain requirements within three working days, such as having relevant skills and acting with integrity, providing full information to clients and the SEC, having a procedure for holding and controlling client assets, complying with laws and regulations, having an office in Nigeria, complying with Anti-Money Laundering/Combatting the Financing of Terrorism requirements, and providing monthly reports to the SEC.

B. REGULATORY INCUBATION PHASE

During the Regulatory Incubation (RI) Program, entities must comply with all provisions in the Guidelines, including restrictions on conducting other investment businesses, making financial promotions that guarantee returns, and onboarding more clients, the maximum of which is capped at 100 clients. Existing clients may be maintained, but new ones cannot be added during the program unless permitted by the SEC. 

The RI Team will provide feedback on the product or service every quarter, and after a year, the entity will receive clear directives from the SEC on the next steps to take and will register as an SEC entity. Entities may be removed from the program if they are found unfit to participate, breach restrictions or conditions, violate laws or guidelines, deviate from their implementation plan, or fail to register or discontinue activities after the one-year period.

CONCLUSION

In conclusion, the Regulatory Incubation (RI) Program offered by the Securities and Exchange Commission (SEC) of Nigeria provides a crucial regulatory sandbox for fintechs to test innovative financial products and services in a safe and controlled environment. The program encourages innovation by providing guidance and support to fintechs, allowing them to refine their offerings and comply with regulatory requirements before entering the market as SEC-registered entities. 

By leveraging the RI Program, fintechs can gain valuable experience, build their customer base, and contribute to the growth of Nigeria’s financial ecosystem. Ultimately, the regulatory sandbox helps to create a more dynamic and competitive financial landscape, benefitting both fintechs and consumers alike.

REFERENCES

1. https://sec.gov.ng/notice-of-acceptance-of-applications-for-the-regulatory-incubation-ri-program/
2. https://sec.gov.ng/finport/
3. https://www.fca.org.uk/firms/innovation/regulatory-sandbox
4. https://www.mas.gov.sg/
5. https://www.consumerfinance.gov/about-us/blog/project-catalyst-collaboration-improve-understanding-financial-well-being/
6. https://sandbox.cma.or.ke/
7. https://sec.gov.ng/finport/
8. https://sec.gov.ng/wp-content/uploads/2021/06/SEC-Regulatory-Incubation-Guidelines_18521.pdf