An Overview Of The SEC Nigeria  Regulatory Incubation Program

An Overview Of The SEC Nigeria Regulatory Incubation Program

Background

The Nigerian securities and exchange market has undergone significant developments in recent years. To foster innovation while ensuring investor protection and market integrity, regulatory incubation has emerged as a mechanism to support the growth of emerging technologies and business models in the securities industry.

Regulatory incubation refers to a regulatory approach whereby emerging technologies or market participants are provided with a controlled environment to test their products, services, or business models under the supervision of regulators. This approach allows regulators to monitor developments closely, assess risks, and tailor regulatory requirements accordingly. This approach involves a balance between fostering innovation and safeguarding investor protection and market integrity

Legal Framework

The primary regulatory authority overseeing Securities and investment related activities in Nigeria is the Securities and Exchange Commission (SEC). The SEC is empowered by various statutes, including the Investments and Securities Act 2007, to regulate the issuance, trading, and offering of Securities in Nigeria. Additionally, the SEC has the authority to introduce policies and frameworks to adapt to market developments and promote innovation. SEC Regulatory Incubation entails the provision of basic requirements that allow this set of potential operators (Fintech Firms) to operate under some prescribed basic but limited provisions for a specified period.

In Nigeria, the SEC has demonstrated a proactive approach towards regulatory incubation through initiatives such as the Fintech Roadmap and the Regulatory Incubation Framework. These initiatives aim to create a conducive environment for Fintech startups and other innovative players to operate within the Securities market while ensuring compliance with applicable laws and regulations. The regulatory incubation program is designed to promote innovation, foster market efficiency, and enhance investor protection within the Securities market. The regulatory incubation framework outlines the eligibility criteria, application process, regulatory requirements, and monitoring mechanisms for entities participating in the program. It sets forth guidelines for the testing, evaluation, and eventual deployment of innovative solutions within the Securities market.

Participants in the regulatory incubation program are subject to regulatory oversight and supervision by SEC Nigeria. They are required to comply with applicable laws, regulations, and best practices governing the securities industry, including those related to investor protection, market integrity, and risk management. SEC Nigeria conducts periodic evaluations and reviews of participants in the regulatory incubation program to assess their compliance with regulatory requirements, the effectiveness of their innovations, and any potential impact on the securities market. Based on these evaluations, adjustments may be made to the regulatory framework to address emerging issues and promote market stability.

Who is eligible to apply?

  • Registered Capital Market Operators

  • Unregistered Fintech innovators that require regulation

  • Firms of all sizes

  • Special interest in firms that want to enhance investor participation in the Nigeria Capital Market

Pre-qualification requirements for selection into the incubation program, which include:

  • The Applicant’s business shall involve an activity that is a financial service either it is carried on in Nigeria or from Nigeria;

  • That the Applicant intends to utilise innovative technology to introduce a novel product or service, or to apply innovative fintech solutions to an existing product or service;

  • The Applicant shall commit to applying for registration as soon as Rules are provided by the Commission;

  • The Applicant must be prepared to commence operations with active customers and subject to the purview of the SEC;

  • The product or service must address a specific issue such as compliance or supervision or offer potential benefits to consumers or the industry.

Note that the Applicant is responsible for ensuring that the product is secure and suitable for investors.

Key considerations for selection into the Regulatory Incubation program

To be eligible, Applicants must ensure that the Innovation is:

  • For application in the Nigeria Capital Market

  • Safe for investors

  • A genuine innovation that introduces a new product/process to serve specific investor needs

  • Able to solve existing compliance or supervisory issues (optional)

  • Ready for testing

Application Process

An intending Applicant is expected to:

A. complete the relevant application form

B. pay a processing fee of N200,000

C. Supporting documents and information to the application are as follows:

  • Full description of the business and the proposed innovative FinTech product, service, or business model including the type of Technology

  • The objectives and parameters for the incubation period

  • The implementation timeline and key milestones for testing

  • The existing/target customers

  • A risk management framework, clearly stating key risks and how they will be controlled and mitigated including insurance cover.

  • Description of how the Fintech Operator will ensure that customers fully understand the risks

  • Description of how communications with customers will be handled before and during the incubation period including how the Fintech Operator will deal with queries, feedback, and complaints

  • Description of the next steps at the expiration of the incubation period and,

  • A clear exit plan if registration is not achieved, including how the Fintech operator will fulfil its obligations to its customers.

Restrictions and Conditions

A FinTech operator under Regulatory Incubation:

a) shall not conduct any other investment business except as presented to the Commission;

b) is prohibited from financial promotions that guarantee returns such as notices, circulars, letters, written or electronic medium of communication addressed to any person;

c) Shall not provide information containing any untrue or misleading statement;

d) shall have the capacity to on-board a maximum of 100 clients who shall be fully informed of the service or product before onboarding. Subject to the Commission’s appraisal and approval, the firm may onboard additional clients if the need arises. Firms that are already in operation shall maintain their existing clients and cease onboarding new ones;

e) shall be under regulatory incubation only for a maximum period of one year after which shall apply for registration if found eligible or discontinue the activity.

The Commission may terminate participation in the RI process and an individual is deemed ineligible to participate in the process if any of the following occur:

i. Changes in eligibility criteria render them unfit;

ii. They violate participation restrictions or conditions;

iii. They breach the Law or guidelines;

IV. They stray from the implementation plan;

V. They fail to promptly apply for registration or submit a notice of discontinuance after one year of regulatory incubation.

Application submission is open till 8th April 2024.

Conclusion

In conclusion, regulatory incubation holds promise as a mechanism to support innovation in the Nigerian securities and investment market. By providing a conducive environment for experimentation and collaboration, regulators can facilitate the development of innovative solutions while safeguarding investor interests and preserving market integrity. It also provides a structured approach for testing new products and services that are normally unregulated by existing regulations.