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Regulatory momentum

Global regulation of online alternative finance will increase over the next two years, says fintech research by the World Bank and the Cambridge Center for Alternative Finance.

Online concept.

A regulatory and legislative boom is underway in the online alternative finance space, according to a global survey of 111 regulatory jurisdictions by the World Bank and the Cambridge Centre for Alternative Finance. The survey will be unveiled on Tuesday 22 October at an event in Kuala Lumpur hosted by the Securities Commission Malaysia.

The report, entitled Regulating Alternative Finance – Results from a Global Regulator Survey, finds that regulators are keen to manage risks associated with technology-enabled activities such as crowdfunding, peer-to-peer lending and initial coin offerings (ICO), while also facilitating the promise of the sector in terms of financial inclusion. However, they are often being held back by a lack of resources, expertise and data, especially in developing countries.

Online alternative finance activities are still largely unregulated, however. Based on regulators’ responses, the research team estimates that by mid-2021, 68 per cent of the jurisdictions will be regulating equity crowdfunding (up from 39 per cent in mid-2019); 43 per cent will regulate peer-to-peer (P2P) lending (up from 22 per cent) and 37 per cent will regulate ICOs (up from 22 per cent). Regulatory changes can also entail reforms, revisions and reviews of pre-existing regulatory frameworks. 

Most jurisdictions where change is underway are planning to create bespoke regulatory frameworks from scratch rather than relying on established securities and banking regulations. There is little evidence of regulators purposefully creating “light-touch” regulatory frameworks for alternative finance as consumer protection and financial stability stay firmly as their top priorities.

Many regulatory changes relating to online alternative finance – more than 90 per cent of reported instances – seem to be informed (and some even triggered) by “regulatory benchmarking”, i.e. regulators reviewing and comparing their frameworks against those of their peers. The United Kingdom, the United States, and Singapore are the most frequently referenced jurisdictions, while other top benchmarked jurisdictions include Malaysia, the UAE (primarily Abu Dhabi and Dubai) and Mexico.

“The momentum – driving access to transaction accounts and electronic payments – is crucial for financial inclusion, but firms and individuals also need access to credit, insurance, long-term savings and pension products and investment capital,”said Alfonso Garcia Mora, World Bank Global Director for Finance, Competitiveness and Innovation. “This survey serves as an important input to our engagement with regulators as they seek to advance alternative finance opportunities. Their experience in benchmarking and exchanging lessons can support risk-informed investment, competition and access to credit for firms and individuals in developing markets.”

Among survey respondents, the amount of human resource devoted to regulating alternative finance has soared since 2017 – by 38 per cent for equity crowdfunding, 32 per cent for ICOs and 12 per cent for P2P lending. However, online alternative finance remains to be more challenging to supervise than traditional sectors often due to the lack of funding, technical expertise and relevant data, as well as the complexity of overlapping regulatory authorities in “multi-peak” jurisdictions.

Regulators are looking to leverage innovation themselves to overcome these limitations: 22 per cent of those surveyed already operate regulatory “sandboxes” and 26 per cent have innovation offices, while 14 per cent have programmes in place that use technology to improve compliance and supervision (i.e. RegTech/SupTech). About 70 per cent of the surveyed regulators would like more outside support from bodies such as multilateral institutions, from academics and from their peers. Regulators in lower-income jurisdictions are more likely to receive support from multilateral development institutions such as the World Bank: 34 per cent of regulators in lower-income jurisdictions did so, as opposed to 16 per cent of their peers in high-income jurisdictions.

Getting alternative finance regulation right is important because the stakes for the real economy are potentially high. Regulators realise potential for online alternative finance: 79 per cent suggest it can improve access to finance especially for micro, small and medium-sized enterprises (MSMEs), 65 per cent expect the same in relation to consumers, and 68 per cent believe that alternative finance can drive competition in financial services.

Bryan Zhang
Bryan Zhang

Bryan Zhang, Executive Director of the Cambridge Centre for Alternative Finance, said: “Based on a global comparative analysis, this report highlights both the opportunities and challenges that regulators are currently facing when it comes to the regulation of online alternative finance. As technology-enabled activities are increasingly being regulated, many regulators are also innovating themselves, learning from their peers, seeking external assistance and aiming to strike a balance between managing harmful risks and enabling good innovations.”

The report devotes attention to lower-income jurisdictions, where the bulk of regulatory change is currently taking place. In these jurisdictions, regulators’ roles in supervising alternative finance are still being defined: only 35 per cent of regulators among those countries already have an explicit mandate to regulate at least one of the three activities examined, compared with 64 per cent of regulators in high-income jurisdictions. Regulatory innovation initiatives are still rare in lower-income countries, but there are notable exceptions: in Sub-Saharan Africa 32 per cent of jurisdictions are either planning or already hosting a regulatory sandbox.

“The digital economy is high on Malaysia’s development agenda. Technology has facilitated the advent of alternative finance which is fueling a significant change in financial inclusion. The World Bank Global Research and Knowledge Hub In Malaysia is very glad to support the partnership among the World Bank, the Securities Commission of Malaysia and the Cambridge Centre for Alternative Finance in producing a timely study which can serve to inform policymakers and other stakeholders on the opportunities and challenges inherent in regulating these issues, both locally and globally”, said Dr Firas Raad, Representative and Country Manager for Malaysia of the World Bank Group.

The survey was conducted through a web-based questionnaire between April and June 2019, included respondents such as securities regulators, capital markets authorities and central banks with authority over the three alternative finance activities studied (crowdfunding, P2P lending and ICOs). Its dissemination was also supported by the International Organization of Securities Commissions (IOSCO).

The Cambridge Center for Alternative Finance is supported by the World Bank Knowledge and Research Hub in Malaysia and the Securities Commission Malaysia.