Regulating for change: Five important considerations
Regulating for change: Five important considerations7 September, 2018 •
I recently participated in a panel at the IAIS Global Seminar in Moscow where a regulator from the audience asked a very relevant question: Given the scale of technological change in my market, how do I still ensure effective regulation? It is a question we’re increasingly hearing from financial sector regulators and reflects a shift in financial eco-systems that could be more significant than the impact of the global financial crisis a decade ago.
The latest wave of digitisation and automation brings with it not just new risks, but a new speed of change, difficult to accommodate in most legal systems and supervisory approaches. These risks can spread quickly within markets and across borders given shared infrastructure and global providers. Cloud computing and super platforms are just early examples. A number of regulators are working at how to best regulate for these innovations as set out in a recent Cenfri publication with Financial Sector Deepening Africa (FSD Africa) drawing on interviews with over a dozen countries.
In considering the question of how to regulate for such extensive change, I see five factors as increasingly significant, especially in developing markets:
- Outcomes vs risks: We need to think about the outcomes that are needed in a market, not just the risks that need to be managed. Focusing only on specific risks may create gaps in what is regulated or may have unintended consequences. Setting a high bar for consumer protection for example can exclude many poorer people from services if it makes inclusive finance business models unviable. Regulatory mandates should be considered to determine if they are appropriate to enable desired market outcomes.
- Policy vs Regulation. In many countries, financial regulators act as de facto policy makers for the institutions or product area that they supervise. This is increasingly problematic given integration in financial service value chains and the emergence of shared infrastructure, which requires cross-cutting decisions agnostic of institution or product. Data regulation is a good example where a lack of a level playing field or regulatory uncertainty inhibits investment in innovation and creates potential harm for consumers. Rwanda’s data regulation for example requires data generated in the country to be stored locally. In the short-term this may add to the cost of doing business, but in the longer-term it can grow local data infrastructure to support innovation. Policy leadership is key to manage trade-offs for effective outcomes across a range of regulatory silos.
- Learning. Regulators and policymakers will increasingly need to find ways of actively learning with their markets and from each other to benefit from technological change. The National Insurance Commission in Ghana, has used a flexible test-and-learn approach to engage with the market to develop and supervise mobile insurance. Innovation forums and sandboxes are further emerging examples of such learning. New skills such as data science and behavioural science will also need to be considered in the regulator team.
- Monitoring. We need new approaches to monitor risks in real time as they arise. Current monitoring approaches are not yet nimble enough to detect risks that can arise quickly to affect large numbers of consumers. This occurred in Zimbabwe where 20% of the population lost their insurance cover overnight due to a dispute between provider partners. Monitoring approaches are also not yet geared to detect new types of risks such as manipulation of customer decisions to consumers’ detriment or the exclusion of vulnerable pockets of society based on more extensive consumer data, e.g. with health wearables. New strategies and tools including Suptech which can draw on more data and provide information in real time will be needed to better identify and manage new risks.
- Coordination. An outcomes-based approach will require effective coordination structures across regulatory silos as well as across jurisdictions. Such bodies require effective mandates and mechanisms for swift resolution of conflict. Local coordination structures may also not be sufficient to manage critical risks in local markets. As reliance on global cloud computing, complex algorithms, super platforms and similar technology increases, domestic regulators may not be sufficiently empowered to manage the risks they pose. Global approaches may be needed, which manage global risks while allowing countries to retain local policy positions.
Innovation happens not only in the private sector, but also in the public sector. I’m encouraged and excited by new platforms such as the recently launched Global Financial Innovation Network (GFIN) that seeks to provide a platform for global knowledge sharing and collaboration for financial sector policy makers and regulators. The GFIN was launched by the Financial Conduct Authority (FCA) in the UK in collaboration with 11 other financial regulators across the world for innovative firms to interact with regulators, helping them navigate between countries as they look to scale new ideas.
It’s this type of ambition for effective regulation and policy that is needed for us to achieve the outcomes we want to see from financial markets. I am excited to engage with regulators and policymakers on this journey.