The value of non-legally binding guidance

Regulation is the regulator’s strongest and most fundamental tool; but it can take years to be published. In Zambia, for example, microinsurance regulation drafted in 2014 was only published in 2021. Despite strong commitment from industry, this wait created uncertainty within the industry and and slowed the development of the Zambian microinsurance market. 

Regulators can use non-legally binding guidance to mitigate the risks of this delay. Non-legally binding guidance can be used to respond swiftly to emerging changes and provide regulatory clarity to industry.

Regulators use non-legally binding guidance to make recommendations, provide guidance, or communicate their position to industry. Unlike subordinate regulation and other instruments regulators use to guide and instruct industry, following non-legally binding guidance is not compulsory. Depending on the jurisdiction, such guidance can be referred to as guidance notes, guidelines or communications but no matter what it is called, non-legally binding guidance has the benefit of being:

• Fast and efficient. Because the process requires fewer steps, issuing non-legally binding guidance is typically simpler and absorbs less of the regulator’s capacity than issuing binding documents. 
• Proportional. Regulators can use non-legally binding guidance to take a more moderate approach when addressing topics that cannot, or need not, be put in regulation. 

In the financial sector

Two fundamental use-cases for non-legally binding guidance emerge for financial sector regulators.

Use case 1: Provides clarity on existing regulation

Regulation cannot account for every aspect of how entities should operate, nor should it. As such, regulators can use non-legally binding guidance to clarify any uncertainties in existing regulation and to resolve any regulatory grey areas caused by overlapping or outdated regulation.

Regulatory uncertainty limits innovation and increases the risks faced by market players, potential entrants and investors. For example, the National Bank of Rwanda’s regulation on licensing conditions for insurers and reinsurers stipulates that insurance providers should demonstrate how their products add value and bring innovation to the market. This vague requirement has already created uncertainty in the industry, particularly for new players. Non-legally binding guidance could create clarity and certainty and thereby incentivize industry to innovate.

Clarifying non-legally binding guidance can be issued with new regulation or later when additional guidance is required. For example, in 2018, the South Africa’s Prudential Authority published a legally-binding directive on the use of cloud computing and the offshoring of data. In conjunction, the regulator issued non-legally binding guidance that provided banks with additional information on the regulator’s requirements and clarified the regulator’s stance and policy.

Use case 2: Addresses matters not included in regulation

Regulators and lawmakers do not always have sufficient information or time to publish regulation. Non-legally binding guidance enables them to respond to emerging changes that have not yet been addressed in regulation. Rather than having industry wait for legally binding documents, regulators can use non-legally binding guidance to set down parameters and address risks in the short term. This allows industry to react to the emerging changes while still meeting their regulator’s expectations.

It is particularly important for regulators to guide industry on new innovations and non-legally binding guidance can be very useful in responding to innovations regulators are less familiar with. Guidance also allows the regulator to take a measured approach and avoid overregulating their market. For example:

• Discussion paper and public consultation used before the New Insurance Act (2017) regulated cell captive insurance in South Africa. While the cell captive insurance market had been active in South Africa from 1993, it was not explicitly referenced in legislation until the Insurance Act of 2017. In 2013 the Financial Services Board issued a discussion paper for public consultation, providing room for the South African market to innovate within a proposed regulatory framework. After the consultation period and the new Insurance Act (2017), the Financial Services Conduct Authority and the Prudential Authority published joint communications solidifying their position on cell captive insurance. The discussion paper, although not legally binding, served as de facto regulatory guidelines for operators within the South African cell captive industry until the new Insurance Act (2017) was enacted.
• Singapore is fostering the adoption of artificial intelligence by partnering with industry on related guidance and by releasing a software toolkit. In 2018, as part of the Singapore National AI Strategy, the Monetary Authority of Singapore launched the Veritas consortium collaborative project in partnership with industry players such as Amazon Web Services. In 2022, the consortium published five non-legally binding guidance white papers on how financial institutions can evaluate whether they are using artificial intelligence responsibly. They also released an open-source software toolkit that can be integrated into the financial institution’s IT systems to automate the fairness assessment methodology detailed in the white papers. The Monetary Authority’s co-creation, ground-up approach allows the regulator to present its industry with practical and actionable principles on artificial intelligence. The consortium also provides the regulator with valuable feedback to inform future regulation.

Scope for further use of non-legally binding guidance

Regulators are confronted with an ever-changing landscape and innovations are emerging more rapidly than traditional regulation can keep up with. Broadening their toolkit to include non-legally binding guidance will help regulators be more responsive and adaptive. This will allow innovative ideas to flourish in their market while mitigating potential risks, thereby leading to greater value for customers.