Frequently asked questions – test and learn environments for Financial Services Innovation | Financial Services Regulatory Authority of Ontario

Frequently asked questions - Test and Learn Environments for Financial Services Innovation

Section 1: Concept, purpose, and applicability

A1. FSRA’s Test and Learn Environments (TLEs) for Financial Services Innovation are a set of virtual environments that allow interested market participants to test out their innovative products, services, and business models using data-driven and evidence-based approaches.

Market participants are encouraged to propose their innovations to FSRA for contemplation, testing, and potentially approval conditional upon the results of testing. Testing occurs in quasi-real market conditions and is structured to allow FSRA to monitor market reactions and apply regulatory safeguards to protect consumers without imposing excessive compliance obligations on market participants.

TLEs aspire to be more elaborated than a typical regulatory sandbox through their focus on learning from the testing process. Relying on data and learnings from the TLE testing process, FSRA will adjust its regulatory response from time to time to ensure relevance and adequacy according to the real-time market reaction to the innovation tested. This contrasts with more traditional regulatory sandbox models seen in the majority of cases worldwide where the sole focus is on validating if an innovation fits a pre-defined threshold.

A2. There are two general forms of TLE.

One form of TLE are Activity TLEs. Activity TLEs focus on testing products, services, and business models that are otherwise non-permitted business activities under the current regulatory framework. They will accomplish this by creating a controlled space for testing to take place while providing data and evidence for future recommendations on legislative or regulatory amendments.

The other form of TLE are Status TLEs. Status TLEs are particularly designed to ensure a level playing field for both incumbents and emerging market entrants by allowing comprehensive participation and validation of both finance and tech innovations while reducing the danger of leaving associated business processes and risks unexamined. Status TLEs may explore linkages with the Global Financial Innovation Network’s Cross-Border Testing initiative if necessary or desirable.

A3. FSRA’s TLEs will facilitate responsible innovation through the supervised testing of innovative products, services, and business models while allowing FSRA to make timely adjustments in regulatory response to ensure the Ontario financial services regulatory environment remains conducive to innovation. For a detailed scope of the financial services sectors our TLEs will be applicable to, please refer to the Approach Guidance.

FSRA’s TLEs will proactively engage with innovators to examine the merits and risks of a proposed product, service, or business model together. TLEs will not dictate what innovation should look like in FSRA-regulated financial services sectors. TLEs will validate innovation opportunities proposed by market participants, draw data and evidence from testing to support development of more appropriate principles-based regulatory approaches, and encourage adoption of new technologies by market participants to achieve innovation.

Q4. The TLE approach guidance speaks to the general approach FSRA is taking to establishing TLEs in its regulated sectors. Why would certain sectors (e.g. auto Insurance) implement TLEs sooner than others? When will other sectors be able to participate?

A4. FSRA is using a pilot approach in the early stages of developing our TLEs. A pilot approach will help us confirm viability and scalability and enable proposed processes and procedures to be tested before we scale bigger. In parallel, we are speaking to industry participants to learn about future scope opportunities to be considered.

Activity TLEs would allow testing of otherwise non-permitted business activities under the current regulatory framework. This requires FSRA to exercise applicable exemptive authority that is expressly authorized by the Government of Ontario or by FSRA’s regulatory discretion.

The Government of Ontario has amended and proclaimed s. 15.1(1) of the Insurance Act and issued O. Reg. 704/21 Exemption Orders effective January 1, 2022. This will enable TLE testing in the automobile insurance sector within a defined scope. FSRA’s first TLE vehicle will be leveraging this expressly-authorized scope. Detailed TLE testing specifications can be found in Appendix 2 of the TLE Guidance.

Section 2: Eligibility, value, and application

A1. The TLEs are open to all market participants that are in good standing with FSRA and other applicable regulators, or who otherwise agree to be subject to FSRA’s jurisdiction. This includes both incumbents registered within FSRA-regulated financial services sectors and new entrants that plan to conduct FSRA-regulated financial services activities.

Market participants that plan on launching a product, service, or business model that is novel in nature and/or may contain elements that the current regulatory framework does not expressly support should apply to FSRA with a potential ‘Innovation Opportunity’ for assessment.

A3. If a new product, service, or business model is novel in nature, it is important that market participants work with FSRA to examine these innovation opportunities collaboratively. This is especially true when the model includes elements not expressly supported or even prohibited by the current regulatory framework.

Market participants should note that validation via the TLEs won’t significantly delay the launch of their new product, service, or business model because admittance to a TLE would entail conditional approval during the testing period within the testing parameters.

A5. No, market participants cannot. A TLE application must include a bona-fide, ready-to-test business case. An entirely hypothetical idea without the commitment of resources by the applicant may be submitted as a Novel Inquiry. FSRA is currently integrating existing practices for handling novel inquiries with the Innovation Process to help streamline and standardize FSRA’s approach to novel inquiries.

A7. Evaluation criteria and the specific process of a given TLE will be defined with reference to the specific exemptive authority being invoked to support the TLE.

When evaluating an application, FSRA will focus on the potential consumer impacts and risks created by the proposed product, service, or business model. We will place importance on the applicant showing that they have fully outlined these impacts and risks, have incorporated safeguards, oversight, and mitigation plans around identified risks, and that the innovation opportunity ultimately will have net positive consumer impacts.

A8. Service standards are currently undefined around timelines for processing a TLE application. As a new process, the service standard will be developed within the first couple months of accepting TLE applications following practical experience.

However, there are some general standards that may guide our service standards. A survey of similar sandbox initiatives from regulators around the world indicates that the shortest service standard is 45 days. FSRA will strive to meet this service standard but cannot guarantee it at this time.

Section 3: The testing and the learning

A1. The duration of a TLE test project depends on the context and objective of the testing. The testing duration will be specified in the mutually agreed to Testing Plan and will be tailored to ensure the innovation opportunity can be fully validated with a useful, comprehensive set of data. Applicants in the auto TLE can apply for an exemption order with a two year testing term, with an opportunity to request a renewal of the exmeption order at the end of that term for a maximum of two more years.

A3. Prior to testing, FSRA will work with the responsible test participant to stipulate a formal Testing Plan that includes mandatory consumer disclosure as a requirement and places boundaries on the scope and nature of the testing.

FSRA will use several tools during testing to protect the public interest:

data analytics will be used proactively to detect potentially troubling anomalies
a direct feedback channel will be created for consumers to provide feedback on a TLE test
precautions will be inserted into all Testing Plans requiring that responsible test participants prepare backup products or services that they can migrate any potentially negatively affected clients over to in the event of problems, along with other remediation plans if a test must be terminated

In the event that a given test has disproportionately negative effects on consumers or on the sector, FSRA can declare termination of the test to protect the public interest and order remediation actions.

A4. A test will be deemed to have reached a ‘mature conclusion’ following the expiry of the testing period as stipulated in the Testing Plan. A maturely concluded test can lead to two outcomes: approving for future use and not approving for future use.

To be approved for future use, all of the critical success metrics in the Testing Plan must be met. For Activity TLE tests, the otherwise prohibited activity being tested will be allowed to be continued by the TLE Participant. In parallel, where appropriate FSRA will recommend that permanent changes be made to applicable laws or regulations

For Status TLE tests, the temporarily-granted conditional licensee or registrant status pertaining to the test cannot be carried over or transferred, becoming invalid upon conclusion of the test. If the activity can be continued, it will be contingent on the market participant pursuing regular licensing or, in some cases, agreeing to a FSRA-approved outcome transferal to another licensee.

If the product, service, or business activity being tested is not approved by FSRA for deployment, the outcome is different by type of TLE as well. For Activity TLE tests, the prohibited practice being tested will remain prohibited with renewed and clarified safeguard measures proposed, while the test-related regulatory certificate is invalidated. For Status TLE tests, the product, service, or business model being tested ceases immediately.

Section 4: Making TLEs work for you

A2. FSRA is committed to facilitating responsible innovation in Ontario’s financial services sectors and making Ontario a best-in-class market for financial services. In keeping with this commitment, we are also committed to looking for innovative solutions and opportunities coming to the fore in the global financial services ecosystem.

FSRA will conduct proactive market scans alongside a variety of engagement initiatives including FSRA Open Day and Innovation Virtual Office Hours. We will also conduct frequent surveys, consultations, and meetings with sector participants and advocate groups to ensure we are listening to and learning from the public.

A3. Yes. The Status TLE is designed with connectivity with the Global Financial Innovation Network’s Cross-Border Testing in mind. This connectivity will help FSRA welcome global financial service innovators to Ontario while supporting Ontario innovators to scale and ‘go global’.

FSRA’s TLEs will be connected with other federal and provincial financial services regulators’ sandboxes through FSRA’s participation in multiple nationwide regulatory harmonization forums.

If FSRA’s jurisdiction cannot be established over an application made to a FSRA Activity TLE, FSRA will refer the application to the corresponding regulator – in most cases, the Ontario Securities Commission (OSC) or the Office of the Superintendent of Financial Institutions (OSFI) – for contemplation.

Q4. Will FSRA operate its TLEs transparently? For instance, will FSRA publicize the names of participating entities, outline their proposed test, and make the outcome of the TLE testing public regardless of the outcome? What if my organization wants to test a product, service, or business model that we do not want to be made public until later?

A4. Transparency in FSRA’s decision-making and rationale in the course of TLE testing is an essential component of ensuring that TLEs inspire trust in the fairness and consistency of their use among consumers and sector participants. FSRA will proactively and regularly publish FSRA’s decisions on which innovation opportunities have been admitted, how they are progressing, their testing outcomes, and implications to the sector. These decisions will include outlines of the rationale and contextual information that they rely on for support. However, FSRA also acknowledges that innovators’ reasonable expectation in protecting their commercially sensitive and proprietary information is equally critical for an innovation-conducive environment.

FSRA collects information pertaining to the proposed innovation opportunities strictly for the purposes of assessing and validating the opportunity through controlled testing and will thus will limit the scope of information collection to information necessary for FSRA to understand how such an innovation opportunity would work.

FSRA will proactively publish its TLE testing decisions along with their supporting rationales and necessary contextual information in order to fulfil its transparency commitments.

However, FSRA will not proactively publish extraneous details of proposed innovation opportunities and will protect commercially sensitive information submitted by TLE participants unless FSRA is compelled otherwise by law.

However, FSRA must remind innovators that FSRA does not guarantee nor indemnify that information submitted through the TLEs will not be disclosed, given the fact that FSRA must abide by requirements stipulated in FIPPA. The TLE Approach Guidance notes, “Market Participants should be advised that admission into a TLE does not provide exclusivity for the activity tested nor immunity for the TLE participant and its innovation from competitive barriers imposed by other participants in the market.”

Once FSRA receives a completed application, it will work with the applicant to define data reporting requirements on a case-by-case basis depending on the details of the specific innovation.

TLE participants must provide necessary disclosure to consumers on the products or services consumers have purchased or received in the TLE. Please see Appendix 1 – Additional Information for the requirements for the mandatory consumer disclosure.

FSRA expects that consumer complaint mechanisms established by TLE participants be accessible, fair, timely, transparent, and effective. Consumers will also have the opportunity to directly contact FSRA to provide feedback.