Fintech, intellectual property and regulatory sandbox

Fintech has become a hot topic in the business and IP fields in recent years, with fintech patents being filed and granted in greater numbers, expanding fintech brands and evovling fintech applications. This trend is set to continue in 2018.

Following similar developments in the United Kingdom, Singapore, Hong Kong and Australia, the Legislative Yuan passed the Development and Innovation for Financial Technology Act on December 29 2017. The act's main aims include:

• promoting the regulatory sandbox scheme for the fintech industry;
• boosting the idea of financial inclusion; and
• fostering innovation by introducing new financial products and services into the market.

The act was published and signed into effect by the president on January 31 2018. It marks a significant advance in the business and IP fields.

Regulatory sandbox
The regulatory sandbox aims to provide a ‘safe place’ for authorised individuals, legal entities, sole proprietorships or partnerships to test innovative financial products, services, business models and mechanisms, while ensuring adequate consumer and market protection. Despite similarities to other country’s regulatory sandboxes, Taiwan’s is the first to be signed into law and grants authorised individuals, legal entities, sole proprietorships and partnerships the world's longest testing period.

The Executive Yuan is expected to announce the act soon. The Taiwan Financial Supervisory Commission (TFSC) is the competent authority tasked with approving, assisting and supervising the implementation of the sandbox. It is now working on establishing standards and rules for applying, supervising and evaluating the act. The TFSC recently revealed that the sandbox’s implementation and supporting measures are on track – it is expected to be established no later than the third quarter of 2018.

Who can apply for a regulatory sandbox?
The regulatory sandbox is open to natural persons, legal entities, sole proprietorships and partnerships (collectively, ‘firms’) that possess innovative ideas and wish to introduce new financial products, services, business models and mechanisms into the market, but who at present are prohibited from doing so due to restrictions under existing laws and regulations. In other words, if an idea can be carried out by obtaining an applicable permission under the existing laws and regulations, said idea will be unable to obtain a ticket to join the sandbox scheme.

How long is the testing period?
Firms may test innovative products and services for at least one year. However, if a firm wishes to extend the testing period, it may do so by submitting an extension application to the TFSC at least one month before the deadline of its testing period. If granted, the extension will be considered a one-off unless the test concerns amendments to existing laws and regulations. Extensions must be less than six months and testing periods for innovative product or service must be less than three years.

What to prepare for applications?
Firms must provide a testing plan which includes information regarding (but not limited to) the following:

• financial sources for the test;
• business activity required to promote the innovative product or service;
• a description of the innovative idea;
• test domain, duration and scale;
• test administrator information;
• critical agreements with testing participants;
• protective measures for test participants;
• risk assessment and solutions;
• risk assessment regarding money laundering or financing terrorism;
• applicable information and security control systems;
• result expectations and mechanisms for evaluating results;
• test exit strategy;
• patents involved in the test; and
• cooperator information and cooperative agendas (where applicable).   

What are the eligibility criteria?
Similar to other countries, the TFSC will consider the following factors when deciding whether to approve an application:

• whether the innovative product or service requires approval from a competent governmental authority;
• whether the solution designed for the innovative product or service is a genuine innovation;
• whether the innovative product or service effectively promotes financial efficiency, reduces costs and benefits consumers;
• whether the potential risks involved have been evaluated and any corresponding solutions have been designed to deal with such risks;
• whether any measures exists to protect participating consumers from potential harm and prepare adequate compensation; and
• other factors and requirements that the TFSC considers necessary.

What is the protective mechanism for participating firms?
Besides matters relating to the Money Laundering Control Act and Financing Terrorists Control Act, on a case-by-case basis and following approval from the TFSC and other competent governmental authorities in related fields, firms will be exempted from certain administrative penalties when carrying out sandbox tests. Further, they will be exempted from certain criminal liabilities which might affect test participants.

What assistance is available and what is the next step after exiting the sandbox?
The TFSC will provide necessary assistance to the firms in the sandbox, including:

• reviewing existing regulations;
• outlining any potential cooperative strategies; and
• providing referrals to applicable commissions in related areas.

After successfully exiting the sandbox test, firms must submit a final report no later than one month after the deadline for the testing period. If the test is successful and the TFSC intends to introduce the innovative product or service into the market, the TFCS may draft a proposal of amendments to existing regulations, within three months after the deadline of the testing period.

Changes and modifications to approved innovative products or services are prohibited during the testing period. However, if changes or modifications are neither material nor substantially harm or undermine the rights of any testing participants, changes and modifications may be made to the test with TFSC approval. Under TFSC supervision, all necessary information regarding the sandbox test must be publicly disclosed on the Internet. 

Compliance checks and IP strategies are crucial tools for fintech industry players. The Development and Innovation for Financial Technology Act reveals Taiwan’s attitude toward a more flexible innovation environment. For firms seeking to make bold advances in this field, success will largely depend on carefully designed IP portfolios and testing proposals.