FinTech Reading 3 PDF

Introduction to FinTech Reading – 3 Fintech Regulation and Compliance K AT YA H U S S R AY This Photo by Unknown author is licensed under CC BY-ND. Content Intro The challenges: How to regulate Fintech? The Digital Customer Journey Smart Nations: Collaboration and Co...

Introduction to FinTech Reading – 3 Fintech Regulation and Compliance K AT YA H U S S R AY This Photo by Unknown author is licensed under CC BY-ND. Content Intro The challenges: How to regulate Fintech? The Digital Customer Journey Smart Nations: Collaboration and Competition Between Jurisdictions Fintech Regulations – Palestine (PMA) Introduction Legal Implications of Fintech From personal finance applications to cryptocurrencies to robo- advisors to peer-to-peer lending platforms, fintech and its yet undetermined consequences on the financial industry has generated a unanimous question for regulators across the world: - What is it and how best to harness its opportunities while adequately managing its risks? Our objective in this chapter is to focus, primarily, on the impact of fintech on the customer, exploring what we have termed the “Digital Customer Journey.” The Challenge: How and Why to Regulate Fintech? The regulation of fintech is subject to a balancing act: How to promote and foster genuinely innovative solutions, while providing a sufficient level of protection for investors and the general public. Rolling out new digital services is about competitiveness and efficient delivery of services, but regulating such services is predominantly about ensuring consumer protection, the sound operation of manufacturers and distributors, and the reliability of the digital services industry and mitigation of new risks that arise from “digital.” The answer to this question and how to achieve the optimal balance will vary, depending on who you ask and in which jurisdiction. Some proponents of fintech solutions might, for example, try to convince you that fintech should be allowed to develop freely and remain unregulated. However, we think that the answer to the question of whether fintech should be regulated at all will be answered consistently by any financial regulator in a major jurisdiction (and that answer will be “yes!”). Nevertheless, divergence between regulators’ approaches tend to quickly emerge when the details are explored. Example: the Monetary Authority of Singapore (the “MAS”) The MAS has a mantra in this area, first publicly espoused by Ravi Menon at the inaugural Singapore fintech Festival in November 2016 and oft-repeated since: “regulation must not front-run innovation.” → it suffices to say that this quote exemplifies the MAS approach to fintech regulation. In Singapore, we have already seen some existing laws being applied to new financial services (e.g., securities laws being applied to initial coin offerings, where appropriate) while others are being developed to address specific fintech risks (e.g., the regulation of payments and digital advisory services; regulation of customer-facing robo- advisory services). The Digital Customer Journey A. Due Diligence The Digital Customer Journey begins before the customer knows about it —with due diligence of the new product or service. Much as with any new product/service launch, it is crucial to establish what the new product or service is. We break this down into three potential buckets: New financial products or services; for example, a completely new structured note or type of bank account Newly digitalized products or services; such as an existing structured note or bank account (or even an entire business) that will transition into an “online-only” offering Hybrids; that tweak the features of an existing structured note or bank account and change the distribution model to online-only B. Marketing and Design Considerations Marketing through digital channels gives rise to a new and unique portfolio of risks and challenges that financial institutions are required to navigate. Ultimately, it is important that business teams engage with legal and compliance colleagues at the product design stage to ensure that any new product or service is designed with regulatory compliance in mind. B. Marketing and Design Considerations (Cont.) Information on a website is available for 24/7 access and from anywhere on the globe, which means customers and potential customers may access the information anytime and from anywhere.In turn, this can give customers the perception that: o The information being conveyed is accurate and complete at all times ✓ giving rise to a liability risk in the event that a person (who may or may not be a customer of the financial institution) makes an investment or purchases a financial product or service on the basis of the information. o The information is available for use in making specific investment decisions, ✓ giving rise to a risk that the financial institution is seen as giving financial advice to the whole world. o The investment products or services being offered can be accessed from any location, ✓ which, among others, gives rise to regulatory and licensing risks for the institution in any country in the world from which people can access the website. B. Marketing and Design Considerations (Cont.) Marketing and design risks can be mitigated using robust disclaimers and notices, much like the disclaimers that are typically used in analog documentation. Such disclaimers would seek to manage liability by making clear that: The information may not be accurate and complete at the time of consumption. The information should not be used for any investment decision without first obtaining independent financial advice. The investment products or services are limited to certain specific countries or locations (e.g., in federal jurisdictions such as the USA, institutions may want to specifically limit their offering to certain states where they have appropriate authorization).  B. Marketing and Design Considerations (Cont.) - chatbots and comparison tools A commonly used digital marketing tool is the “chatbot” or its less -advanced cousin, the comparison tool. These tools allow customers to compare different available products or services and find out further (usually rudimentary) information about such products or services. While the fundamental risk associated with a customer interacting with a bot is similar to the analog interaction with a human (i.e., that the bot, or the human advisor, makes an incorrect statement or recommendation). While a human advisor may have a bad day and, perhaps, make inadvertently inaccurate statements to one or two customers, a systemic and unchecked fault in a tool or a bot could lead to unintended consequences for hundreds, if not thousands, of customers. --> while control over human advisors can be implemented through written policies and procedures (together with an element of training and monitoring), control over a tool or a bot will require the introduction of more technical (and technological) expertise. B. Marketing and Design Considerations (Cont.) - Data Protection Rolling out a brand new digital offering gives an organization a unique opportunity to take a “privacy-by-design” approach: meaning, designing the platform with privacy compliance requirements in mind—to the development of its new platform. The obvious concerns would be to ensure that the platform has comprehensive terms of use and privacy terms to ensure that the organization has complied with requirements (e.g., obtaining appropriate consents from users) to use personal data in the way it intends, and to have in place robust technological and operational measures to keep any data that it holds secure. C. Pricing/Quoting The use of a digital platform gives institutions a unique opportunity to dynamically price products or services on a never-before-seen scale. This is most relevant in industries where risk forms a key element of a price or quote—a prime example being the insurance market. o The use of data analytics/“Data analytics” simply refers to the process of analyzing (often large) datasets to discover useful information to improve operational efficiencies and find new solutions to existing problems o Pricing Algorithms can ensure a more objective price taking into considerations that, with algorithms, a flaw, if undetected, can adversely impact a material number of clients in a short space of time.  Read the following article to be discussed next class. You can watch The Great Hack movie as well. Article Link: https://www.bbc.com/news/ technology-64075067 Cambridge Analytica – Assignment (next class) D. Advisory Services Not all financial institutions provide advisory services, but those who do owe a particular duty to their clients. Across many jurisdictions, advisors are required to ensure that their recommendations are suitable for their clients and consider a broad range of information, such as the customers’ investment experience, financial objectives, and financial situation. Can a robot ever do this as thoroughly or thoughtfully as a human advisor and in compliance with applicable regulatory obligations? D. Advisory Services (Cont.) What is a robo-advisor? A robot that can provide individual, tailored financial advice. In fact, while this can be an accurate representation of a robo-advisor, robo-advisory services are typically seen as a phenomenon that has taken hold in the wealth management industry as a tool which is able to construct and rebalance client portfolios. Who is liable? When dealing with a traditional wealth manager, blame is easy to pin on the client manager providing the advisory service. In the robo-advisory space, the immediate fall-guy is removed. Should regulatory liability attach to the board of directors, or to the senior manager who is designated as responsible for running the algorithm instead? Or should blame be attached to the engineers, if any fault is technical in nature? The question of liability will be a key one for regulators to consider as robo-advisory services increase in pace and scale. This Photo by Unknown author is licensed under CC BY. E. Purchasing the Product or Service The point of purchase: Where the potential customer becomes the actual customer. At this stage of the Digital Customer Journey, there are a number of important considerations to be explored: - KYC - AML E. Purchasing the Product or Service (Cont.) Know your customer (KYC) Anti-money laundering (AML) A key challenge in the future, particularly for financial institutions (e.g., private banks) dealing with sophisticated or complex clientele, will be how to use technology to obtain, beyond the basics such as name and domicile, the more challenging pieces of necessary KYC information such as source of wealth and funds E. Purchasing the Product or Service (Cont.) - E-signing The ability to contract, and sign, customer-facing documents electronically is becoming an area of increasing interest to financial institutions. Customers are starting to expect much more convenience and much less physical paperwork when they procure products and services in the digital world. However, there are three main risks that arise from contracting electronically. Identity risk: Organizations cannot always be sure that the other party entering into a contract is in fact the actual person. Integrity risk: The very nature of going digital invites the potential for compromise in the security and integrity of electronic communications (e.g., through cyberattacks or network failures). Authority risk: This arises especially in the case of corporate counterparties, where there may be concerns about whether an individual entering into a contract on behalf of a corporate counterparty has the necessary authority to bind that party. F. Data Storage 1- Cybersecurity With a number of high profile, large scale cybersecurity incidents happening recently, there has been an increased global focus on cybersecurity and data protection regulation. 2- Personal Data Protection 3-- Banking Secrecy 4- Cloud Services:Cloud services are increasingly popular as a solution for data storage G. Customer Complaints & On- going Customer Relationship Complaints are an unpleasant but ultimately unavoidable step along any customer journey. Financial institutions must always be ready to receive complaints and to deal with them fairly, professionally, and promptly The final stage of the Digital Customer Journey is to examine the impact of technology on the business-as-usual ongoing customer relationship. Ultimately, the considerations to bear in mind throughout the ongoing customer relationship are broadly the same as those already discussed in this chapter: The use of data analytics, how customer data can be used and stored, how marketing should be conducted and when an institution will be deemed to be giving “advice,” and how algorithms should be used and monitored. Fintech Regulation in Palestine - PMA The PMA’s interest in this technology stems from the reality of its social and national responsibility, as it launched, in this context, a series of initiatives aimed at developing and supporting the financial technology sector and promoting digital transformation and infrastructure for payment systems in Palestine. This includes 1. the creation of the Financial Technology and Creativity Department within its functional structure to follow up and implement strategies, 2. monitoring developments in the local and global market, 3. building capacity in the PMA and the financial sector, as well as forming an advisory team for financial technology. https://www.pma.ps/fintech/en/index.html What Is SandBox? Experimental test space for financial institutions, startups, individuals, and entrepreneurs Licensed by the PMA (Palestine Monitory Authority) for testing innovative solutions in finance Aim is to test innovative solutions in real customer scenarios within a specified period Promotes sustainable innovation while protecting consumers Evaluates impact of new technologies on financial services market Helps PMA keep pace with rapid changes in financial technology Welcomes local and global companies for testing new digital solutions Provides controlled environment for testing during specified period Thank you ☺