Executive Summary
Background
The World is rapidly evolving and importance of technology has grown astronomically for any
industry. Digital innovation has helped the financial sector to grow rapidly and the participation
of non-financial providers has transformed the way financial services are delivered. There is an
increasing blurring of the division between traditional financial companies and technology
players.
The Indian financial sector has undergone significant transformation over the last few years and
has witnessed tremendous growth of new age FinTech firms, and corresponding investments in
such firms. However, as the involvement of FinTech in banking sector matures, innovators are
seeking to disrupt other financial services, and pension is viewed by many as the next great
opportunity for investment.
Innovative applications of technology for financial services are being used across the financial
sector and pensions is no exception. The National Pension System (NPS) utilizes a completely
digital architecture with Pension Funds, Custodian of securities, Central Recordkeeping
Agencies, Points of Presence and Government Nodal Offices among other intermediaries which
are continuously engaged with the System in terms of data/information as well as money flow.
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. Nonetheless, increasing reliance
on technology has presented itself with different challenges of cyber security and consumer
protection.
Considering the enormous potential of FinTech innovations and today’s rapid pace of change,
regulations will also need to evolve in order to ensure subscriber protection without
inadvertently stifling innovation. In order to nurture such innovations, while simultaneously
safeguarding subscriber interests, several regulators across the world have precisely done this 10
taken a variety of regulatory and supervisory initiatives such as regulatory sandboxes,
innovation hubs, incubators etc.
With this context, a Group to identify areas under NPS which could utilize FinTech through
Regulatory Sandbox was constituted at the instance of the Authority in November 2018.
The Group was addressed by Sh. Hemant G. Contractor, Chairman, PFRDA in its first meeting.
The Group was oriented to follow a problem solving approach wherein firstly the problems or
areas of improvement which could benefit from FinTech could be identified.
The Group was guided by the Terms of Reference it was provided and the overall direction
provided to it by the Chairman, PFRDA in the first meeting of the group. The Group submits its
report to the Authority after holding three meetings in totality, however member from NPCI
could not attend any of the meeting. The Group also interacted with a few FinTech firms to
gauge their view and opinion.
The Group also studied domestic and international scenario with respect to regulatory sandbox
models and experimentation.
Pension Fund Regulatory and Development Authority(PFRDA) has been playing an active role in
understanding FinTech and how it can serve subscriber’s needs and improve experience. This
report will be another step in the direction of promoting innovation in industry across the
entire value chain.
Recommendations in brief
The major recommendations of the group are as under:
a) The vision of the PFRDA is “To provide a conducive environment for FinTech innovations to make NPS value chain more effective and efficient in terms of availability, accuracy, cost and transparency in the best interest of the subscribers while preserving safety and
soundness of the NPS architecture”
The Fintech applications may be useful in the following areas of NPS:-
I. Onboarding process- paperless pension account generation, compliance to Know
Your Customer/Due Diligence and Prevention of Money Laundering
II. Financial Inclusion
III. Transactions- flow of contributions from subscriber through banking channels to
Pension Funds, subsequent investments and credit in pension account near to real time. Execution of subscriber instructions in real time
IV. Investments- Robo Advisory/Artificial Intelligence for enabling informed choices
by subscribers (fund manager/assets/switches) as per risk appetite/profile.
Adoption of Algorithm trading by Pension Funds, real time settlement of trades,market valuation of investments etc.
V. Areas of Recordkeeping such as change in subscriber data, recording payment of
contribution and unitization (exploring use of block chain/distributed ledger) Subscriber servicing process viz. change in subscriber data, payment of contribution and unitization.
VI. Mechanism of Grievance Resolution – Robust mechanism with zero tolerance
limit and resolution in near to real time using DMAIC (Define-Measure-AnalyseImprove-Control)
VII. Withdrawals/Exit process/Maturity viz. transition from accumulation to decumulation phase; seamless funds outflow and integration with Annuity Service Providers.
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VIII. Enabling subscriber to make informed choices viz. Robo Advisory for exercising
the choices available; switching of PF, allocation of investments, analyzing the portfolio for retirement planning, selection of annuity plan etc.
IX. Compliance of PFRDA’s Act and Regulations (RegTech)
X. Supervision of intermediaries and Analytics (SupTech)
b) Only those fintech applications that fall solely within the remit of PFRDA shall be
allowed to apply. Inter regulatory applications shall be kept out of the purview unless
the requisite permissions from other regulators are already in place.
c) Based on the discussions of the Committee it was recommended that the cohort
approach to PFRDA Regulatory Sandbox may be followed with a focus on the areas
which have been delineated., which allowings flexibility to the applicants and case to
case analysis by the Regulator for selecting applications prudently.
d) The report may be placed in the Public Domain for comments, from the market
participants and other stakeholders.
e) Guidelines/ Regulations, which may be in the nature of “Light Touch
Regulations/Guidelines” may be framed based on the feed back received and shall be
got approved from the Authority.
f) Sand Box 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 competent authority. It may be noted that no statute /
Act can be allowed to be waived.
g) A three tier Governance structure is recommended- Board, PFRDA Sandbox
Implementation & Evaluation committee and Regulatory Sandbox department.
h) Appointment of Chief Innovation Officer/ FinTech Officer is recommended.
i) The Sandbox may run through the following phases- Application, evaluation of
application, Testing period, Exit and Post Testing Evaluation.
j) Three Sandbox tools are recommended- limited registration, Waivers , Non
Enforcement letters and Steering & Guidance.
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k) It is important to create a buzz around the regulatory sandbox for its success. Hence, the
Authority may like to publicise the launching of sandbox activity at each stage through
social media and other platforms.
l) A website for the Regulatory Sandbox may be launched or a separate section may be
created on the existing PFRDA website
m) The Authority may coordinate with Nasscom and the 10,000 start up programme for
tapping into the Information Technology startups and draw their attention to PFRDA
Sandbox for effective participation.
n) The Authority may share findings from the test with the financial services industry and
regulators, while ensuring that no confidential information such as consumer data or
proprietary information is disclosed. These findings may provide details on overview of
the test, results and recommendation on regulatory change.
o) Inter Regulatory Sandbox-PFRDA may endeavor to participate in the Inter regulatory
sandbox as the Subscribers do not recognize financial sector silos and the financial
transactions and experiences transverse the various financial sector space. These Inter
regulatory sandboxes may be set up under the aegis of the FSDC.
p) International Cooperation- A lot of jurisdictions have already entered into MOUs with
other jurisdictions / Regulators for coordination and exchange of information on
Regulatory Sandbox. PFRDA may also endeavor for technical assistance or MOU with
countries which already have sandbox in place.
q) Global Sandbox- Many jurisdictions including FCA, UK have been deliberating on the
idea of having a Global sandbox providing a setting for regulators to collaborate on
common challenges or policy questions firms face in different jurisdictions. A wide range
of topics and subject matters may be highlighted, particularly those with notable crossborder application. Among issues highlighted were artificial intelligence, distributed
ledger technology, data protection, regulation of securities and Initial Coin Offerings
(ICOs), know your customer (KYC) and anti-money laundering (AML), which may be
tested in the global sandbox in collaboration with other jurisdictions. one of the main
advantages for the global sandbox may be reducing the time it takes to bring ideas to
new international markets.
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