Mongolia: Regulation For Regulatory Sandbox

1. Introduction

The whole process of introduction of financial services based on technological innovation to the financial market is called Fintech. Upon the introduction of new products and services to the market with the help of Fintech, financial institutes become able to conduct a wider range of activities at a lower expense.

Sandbox regulation is one type of the regtech which aims to develop a regulatory environment that suits fintech companies and protect consumers, without hindering the rapid changes and development of the market. Regtech is a combination of the terms - "regulation" and "technology" and is a type of technology aimed to resolve the regulatory and compliance issues in the financial sector. As financial products and services become more digital, information privacy, cyber-attacks, money laundering and other fraudulent activities increase. At this time, Regtech companies protect financial institutes from risks and facilitate risk management processes using technologies such as the cloud system and big data.

The sandbox environment is a relatively new regulatory mechanism. By implementing the sandbox, regulatory institutions will be able to identify new products and services coming out on the market, set out appropriate regulations, and understand new types of markets.

2. Regulation for Regulatory Sandbox

At the regular meeting of the Financial Stability Council, the Governor of the Central Bank of Mongolia, the chairman of the Financial Regulatory Commission, the Minister of Finance, and the Executive Director of the Deposit Insurance Corporation approved the Regulation for Regulatory Sandbox by an Order No ?-63/64/32/?/27 on March 1, 2021. The purpose of this regulation is to create a regulatory sandbox environment that offers an opportunity to test for a certain period in a real environment that covers a limited range under the supervision of the Financial Regulatory Commission and the Mongolbank in order to introduce newly launched technology-based innovative products, services, and business models into the Mongolian market, to identify criteria for participants, and to regulate relevant relations. A participant to the sandbox (hereinafter referred to as the "Participant") shall have met the following requirements:

• Participant shall be a legal entity registered in Mongolia;
• Participant shall not have overdue debts to banks and financial institutions;
• Shareholders and executive officials shall not have previous criminal convictions for www.gratanet.com money laundering or financial crimes;
• Share capital invested by a shareholder shall have met requirements under the Law on Combating Money Laundering and Terrorism Financing.

The term of the sandbox shall be 1 year and may be extended once for up to 1 year at the request of the Participant.

Entering into the sandbox

An application to enter into the Sandbox is accepted by the Sandbox Unit twice a year, during the first 10 days of March and September. The applicant shall submit the following documents in Mongolian:

• An official letter requesting to enter into the Sandbox;
• Application form;
• Business plan;
• Internal control program;
• Procedures for the delivery method of products and services to consumers, identification of consumers and ultimate beneficial owners, and reduction of the risk;
• State stamp duty;
• Other documents.

The applicant is obliged to present their business plan, products, services and technological solutions to the Sandbox Board in person within the specified time after the submission of the request.

The Sandbox Unit shall notify in writing within 30 days from receipt of the request whether the applicant has met the requirements of the sandbox. If the request is denied, the Sandbox Unit shall refund the payment based on the decision of the Sandbox Board.

Withdrawal from the sandbox

The Participant shall withdraw from the sandbox upon the termination of the sandbox term or early termination upon a decision by the Financial Regulatory Commission or a request by the Participant. The participant shall withdraw from the sandbox in the following cases:

• The participant has violated the laws and regulations;
• The participant has violated the terms and restrictions set out by the Financial Regulatory Commission;
• The participant was found to have misled, misrepresented, or concealed information;
• The products and services offered by the Participant no longer meet the requirements under this regulation.

In case of early withdrawal of the participant from the sandbox, the participant will be notified in at least 30 day-advance and the justifications and decision will be explained in detail. When the Participant withdraws from the sandbox, they shall notify consumers that their business is ceased. Additionally, the Participant is obliged to compensate the consumers' financial losses in an agreed amount.

Consumer protection

The Participant is required to take consumer protection measures and obliged to notify of the following conditions when offering their products or services:

• The participant has not obtained a license on their activities from the Financial Regulatory Commission;
• There are potential risks to consumers;
• In case a consumer being suffered financial loss, the amount of compensation to be reimbursed shall be mutually agreed;
• The Financial Regulatory Commission shall not be responsible for the liabilities of the Participant to others.

The Participant must obtain consumers' consent only in writing. A product or service offered by the Participant shall be in plain language and shall not be misleading and ambiguous. Consumers shall make an independent decision to purchase the product or service upon fully comprehending the offer.