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The Role of Regulations in the Development of Digital Finance

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This presentation focuses on the balancing act between innovation, safety and soundness of digital financial services as well as steps to support consumer protection. It also includes a review of the current guidelines and a checklist format to guide regulators and policy makers to compare their own regulations, policies, environments and supervisory capacity in relation to emerging developments in the field of DFS.

Veröffentlicht in: Wirtschaft & Finanzen
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The Role of Regulations in the Development of Digital Finance

  2. 2. KEY ASPECTS OF DFS REGULATIONS • Proportionate AML/CFT (FATF Compliance) • Tiered KYC Regulations • E-Money Operator Regulations and Guidelines • Remote Account Opening Rules • Agent Regulations (for banks and NBFIs) • Security and Fraud Mitigation • Consumer Protection Issues • Interoperability • Fair Access to ICT • Retail Payment Systems Laws and Regulations • Competition Policies
  3. 3. Risk-based approach to AML/CFT regimes and financial inclusion  In 2012, FATF revised the recommendations to combat money laundering and the financing of terrorism.  Countries should identify, assess, and understand the money laundering and terrorist financing risks for the country, and can follow a risk-based approach commensurate with the risks identified.  Allows a new level of flexibility in the application of certain elements of a country’s AML/CFT regime, which should complement, rather than inhibit, national financial inclusion efforts.  FATF further states in Recommendation 1: “where countries identify lower risks, they may decide to allow simplified measures for some of the FATF Recommendations under certain conditions.”  The area where this is most relevant is in the context of customer due diligence (CDD)  Allows for tiered KYC procedures.
  4. 4. PRUDENTIAL AND MARKET CONDUCT REGULATIONS These include:  capital requirements  reserve requirements  governance requirements  reporting and disclosure requirements
  5. 5. DFS AND CONSUMER PROTECTION ISSUES Adequate and Complete Information Other risk factors that should be considered as the regulator prepares consumer protection for DFS include: • New technology as a source of risk • Risks associated with agents • Particular challenges with new services and/or DFS providers • Consumer and data privacy concerns • Outsourcing to third-party service providers
  6. 6. SETTING UP CONSUMER PROTECTION POLICIES AND REGULATIONS FOR DFS Regulatory framework for consumer protection: • DFS providers are licensed to operate under clear rules to protect consumers • Level playing field that promotes competition • Standards for disclosure and transparency of information; • Simplified consumer protection rules for low-value transactions; • Responsibility for all their services (including through a third-party or agent; • Clear data privacy and confidentiality rules are in place; • Adequate complaint resolution; • Relevant data has been collected by the regulator.
  7. 7. CREATING THE REGULATORY ENABLING ENVIRONMENT AND PROVIDING PROPER OVERSIGHT AND SUPERVISION OF DFS Relevant Core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion • Principle 1: Responsibilities, objectives and powers • Principle 2: Independence, accountability, resourcing and legal protection for supervisors • Principle 3: Cooperation and collaboration • Principle 4: Permissible activities • Principle 5: Licensing criteria
  8. 8. CREATING THE REGULATORY ENABLING ENVIRONMENT AND PROVIDING PROPER OVERSIGHT AND SUPERVISION OF DFS (CONT.) • Principle 8: Supervisory approach • Principle 9: Supervisory techniques and tools • Principle 10: Supervisory reporting • Principle 11: Corrective and sanctioning powers of supervisors • Principle 12: Consolidated supervision See the Basel Committee on Banking Supervision: Guidance on the application of the Core principles for effective banking supervision to the regulation and supervision of institutions relevant to financial inclusion http://www.bis.org/bcbs/publ/d351.pdf
  9. 9. ADDRESSING ACCESS ISSUES - REGULATORY OPTIONS • Tiered KYC • Alternative ID options • E-money regulations • Agent regulations
  10. 10. COUNTRY CASE STUDIES E-Money Regulations (case study comparing Kenya, Philippines, Russia & Uruguay)
  11. 11. AGENT BANKING REGULATIONS Three issues determine the best liability rules in any context. 1. Allocation of risk and economic incentives 2. Agent insolvency risk 3. Agent supervision Regulating banks’ and MNOs’ use of DFS agents requires an appropriate legal framework. Factors influencing the framework’s design include the following: • Business relationship; • Principal-agent contract; • Supervisory and regulatory structure; and • Legal foundation of the economy (common or civil)
  12. 12. AGENT BANKING REGULATIONS • Who can be an agent? • What are the agent eligibility requirements? • What can an agent do? • Restrictions on fees charged by agents? • Can an agent subcontract? Are super-agents allowed? • Can agents be exclusive or must they be non-exclusive? • What is the principal liability for agents? See CGAP Focus Note: Regulating Banking Agents https://www.cgap.org/sites/default/files/CGAP-Focus-Note-Regulating-Banking- Agents-Mar-2011.pdf
  13. 13. AGENT REGULATIONS – COUNTRY CASE STUDIES Case study comparing Fiji to Kenya
  14. 14. DFS CONSUMER PROTECTION ISSUES 1) Risks for DFS Consumers Adequate and Complete Information New Technology as a Source of Risk Risks Associated with Agents Providing DFS Challenges with New Services and Service Providers Consumer Privacy Concerns with DFS
  15. 15. DFS CONSUMER PROTECTION ISSUES 2) Outsourcing and Third Party Service Providers 3) Responsibilities of the DFS Providers 4) Responsibilities of the Financial Regulator 5) Responsibilities of the DFS Consumer 6) Smart Campaign Principles Applicable to DFS
  16. 16. DFS CONSUMER PROTECTION PRINCIPLES 1. Appropriate product design & delivery • Advertising and marketing practices • Electronic payment processing & collection practices 2. Prevent of over-indebtedness 3. Transparency • For borrowers • For investors (individual and institutional especially relevant for marketplace lenders) 4. Responsible pricing
  17. 17. DFS CONSUMER PROTECTION PRINCIPLES 5. Fair and respectful treatment of clients • By digital providers • By brokers/mobile lead generators/aggregators • Big data and non-discrimination 6. Privacy of client data • Privacy notice • Opt-in/Opt-out standards • Management of third-party service providers/vender to protect client data 7. Mechanism for complaint resolution 8. Compliance with local laws and regulations for lending
  18. 18. DFS CONSUMER PROTECTION PRINCIPLES 9. Security and risk management practices/standards • Safety and soundness practices • Authentication and security information • For Mobile Channel – customer mobile security measures • Consent to communicate electronically • Risk management practices • Network Stability 10. Governance & Controls
  19. 19. DFS CONSUMER PROTECTION PRINCIPLES 11. Implementation of a code of ethics 12. Responsible Investment – Environmental, Social, Corporate Governance 13. Targeted Financial Education 14. Regulatory Empowerment & Focus
  20. 20. NEXT STEPS - RESPONSIBLE DIGITAL FINANCIAL SERVICES DFS Providers Industry Associations Clients Investors Consumer Protection / Market Conduct Regulations Reputational Risk Business Case
  21. 21. CLASS EXERCISE Discuss the various risks faced by DFS Consumers from your perspective. With more partnerships and traditional financial players connecting to third party service providers, what are the particular risks that should be taken into account from a consumer protection standpoint? What should be the responsibility of the financial regulator, the DFS providers and ultimately those of the consumer?
  22. 22. Thanks johnvowens@me.com Twitter: @jvowens