Data deepens our understanding of markets and consumers
And the power of data is becoming increasingly important for financial authorities all over the world.
Data can keep track of increasing complexity
As the number of financial services providers and the complexity of their products and services increases, there is less time and resources for onsite inspections and other intensive supervisory activities.
In their 2020 data strategy, the United Kingdom’s Financial Conduct Authority describes the need to gain a deeper understanding of the behaviour of financial services providers and consumers so that they can swiftly identify and respond to issues. Indeed, regulators can use data to inform their decision-making and measure the outcomes of different policy responses (see our post, “We are blind without data”).
Define your objectives and set measurable targets
In UNCDF’s view, the first step in any data strategy is to clearly define your objectives. According to CGAP’s Financial Inclusion + Stability, Integrity, and Protection (I-SIP) framework, many financial authorities juggle multiple policy priorities, including:
1. Inclusion
Access to financial services
Usage of financial services
Quality of products and service delivery
Impact of financial inclusion on households’ and firms’ outcomes
2. Protection
Disclosure and transparency
Fair treatment and business conduct
Data protection and privacy
Dispute resolution mechanisms
Guarantee schemes and insolvency
Financial capability
3. Stability
Stability (no disturbances, resistance to shocks) in:
Financial infrastructure
Financial institutions
Financial markets
4. Integrity
Assessment, understanding, management, and mitigation of money laundering/financing of terrorism risks
Customer and beneficial owner identification, verification, and risk profiling
Reporting of suspicious transactions and frozen assets
On financial stability and financial integrity – global standard setting bodies such as the Basel Committee on Banking Supervision and the Financial Action Task Force (FATF) and international organisations such as the International Monetary Fund release comprehensive guidance including specific risk indicators against these objectives.
On financial inclusion and consumer protection – we would like to highlight these areas given UNCDF’s experience and focus. While there is also excellent guidance from organisations including the Global Partnership for Financial Inclusion (GPFI) and G20, Bank for International Settlements (BIS) and International Monetary Fund (IMF), we recognise that:
These policy priorities are relatively new in comparison to financial stability and integrity. According to the World Bank’s Global Financial Inclusion and Consumer Protection (FICP) Survey, most countries established a separate financial consumer protection team after 2010.
It is difficult to balance multiple priorities. To address this challenge, some countries such as South Africa have adopted the ‘twin peaks’ model to create two authorities – the Prudential Authority and the Financial Sector Conduct Authority – to supervise financial institutions from these two different perspectives.
Countries without a twin peaks model (the vast majority), consumer protection/market conduct supervision is not always at the same hierarchical level as prudential supervision. This means that market conduct supervisors can have a lack of ‘voice’ and have fewer staff and resources.
Link policy and supervisory objectives
At UNCDF, we’ve seen that it is crucial for financial authorities to link their policy and supervisory objectives.
If there is no clear link, there is also no strong incentive for supervisors to collect the relevant data to assess performance over time and adjust efforts accordingly. For example, the policy objective to ‘increase the percentage of adults with a formal financial account’ must be linked with supervisory concerns such as healthy capital and liquidity ratios, the amount of money in the formal financial system vs. unregulated channels, and default rates on low-value, high-rate digital loans, i.e. the safe and sustainable growth of financial services providers.
For instance, in market conduct supervision, the Financial Conduct Authority requires providers to consider whether their customers face any risks in health, life events, resilience and capability (which can disproportionately affect women) and take special care to treat these customers fairly.
See CGAP’s example below on how data needs can be mapped by financial authorities:
Consumer protection example
Policy objective: Protect financial consumers
Specific supervisory objective: Monitor the evolution of consumer complaints related to non-bank e-money issuers
Data need (scope: high level): Number of complaints about e-money issuers relative to the number of e-money accounts issued
Data need (scope: data points): Total number of e-money accounts, by e-money issuer; Total number of complaints, by e-money issuer
Data need (periodicity): Quarterly
Data need (format): Aggregated data (calculated and reported by the institution); Engage with public and private players
Financial authorities are never starting their data strategies from scratch.
We suggest engaging with all relevant internal and external stakeholders to understand existing data and indicators relative to supervisory objectives, identify any gaps or overlaps, and discuss how to address these.
Other government departments and agencies
We advocate for a collaborative process across all relevant government authorities to:
Identify who collects which types of data from which financial services providers
Avoid duplicate reporting requirements
Reduce compliance costs and improve accuracy of data
When multiple authorities are involved in supervising institutions – such as mobile money providers – one of the quickest ways to formalise cooperation and facilitate data sharing is a functional memorandum of understanding (MOU). For instance, in Tanzania, an MOU between the telecommunications regulator, Tanzania Communications Regulatory Authority (TCRA), and the financial sector regulator, Bank of Tanzania (BOT), has enabled BOT to access mobile money transactions data on TCRA’s monitoring system.
Financial services providers
UNCDF always recommends financial authorities to consult and engage with the industry before adding or changing any data reporting requirements, including new or different formats.
A consultation process on reporting can help authorities to:
Communicate the link between their objectives and priorities to the data needs
Understand if financial institutions can produce the desired data upon request
Discuss potential advantages (such as understanding customer experiences, identifying gaps in the market, and publishing aggregated industry statistics) which can encourage institutions to cooperate with new data requirements
Authors
Naomi Bourne
Aneth Kasebele
Alexis Ditkowsky