Regulating Alternative Finance

Results from a Global Regulator Survey

Philip Rowan, Margaret Miller, Emmanuel Schizas, Bryan Zheng Zhang, Ana Carvajal, Apolline Blandin, Kieran Garvey, Tania Ziegler, Raghu Rau, Douglas Randall, Alicia Hu, Zain Umer, Katherine Cloud, Leyla Mammadova, Jaesik Kim and Nikos Yerolemou.

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Regulating Alternative Finance – Results from a Global Regulator Survey is a report that details the key findings from a global regulatory survey that was jointly conducted by the World Bank and the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School. This study intends to understand the global regulatory landscape and regulators from 111 jurisdictions around the world participated in the survey.

Highlights from the report

  • Alternative finance is still typically unregulated – but bespoke regulation is catching on. Despite a boom in alternative finance regulation since 2015, the relevant activities are still not formally regulated in most jurisdictions – only 22 per cent of jurisdictions formally regulate P2P lending, as opposed to 39 per cent for ECF and 22 per cent in the case of ICOs. More often, they are subject to bespoke regulatory frameworks, particularly in the case of P2P lending (12 per cent of jurisdictions) and ECF (22 per cent of jurisdictions).
  • The potential of alternative finance speaks to a new set of regulatory objectives.
    Policymakers globally are keen to explore the promise of alternative finance. A clear majority are optimistic about its potential to improve MSMEs’ and consumers’ access to finance (79 per cent and 65 per cent respectively) and stimulate competition in financial services (68 per cent). Such expectations chime with regulators’ emerging priorities, as many now have statutory objectives to support financial inclusion, economic policies or competition. While regulation is not the norm today, by mid-2021 most jurisdictions will be regulating ECF and more than a third intend to regulate P2P lending and ICOs; bespoke frameworks will likely become even more common.
  • Benchmarking drives global regulatory change.
    Regulatory benchmarking is used by more than 90 per cent of regulators when reviewing alternative finance regulation, and lessons learned from other jurisdictions have prompted changes in regulation more frequently than any other trigger (56 per cent to 66 per cent of regulators, across the three activities). The most benchmarked-against jurisdiction is the UK, followed by the USA and Singapore, but emerging markets such as Malaysia, the UAE and Mexico also rank among the top 10.
  • Alternative finance regulation is about making the sector safe at scale.
    Alternative finance regulation seeks to make the sector fit for the mass market, including both individual investors and MSMEs. Ensuring liquidity or minimising the potential for capital losses do not appear to be prioritized over those goals. This may be an indication of how regulators interpret their consumer protection mandates in relation to alternative finance.
  • Alternative finance regulation isn’t ‘light touch’.
    There is little evidence yet of regulators purposefully creating light-touch regulatory frameworks for alternative finance. If anything, purpose-built regulatory frameworks tend to have more obligations in place than pre-existing ones – out of 20 potential obligations examined in the survey, the average bespoke frameworks for P2P lending or ECF featured nine, against five for pre-existing ones. For ICOs, the balance was five versus three. They tend to prioritise checks on investor exposure, rigorous due diligence on fundraisers, client money protection and appropriate online marketing standards.
  • As supervision stretches their resources, regulators are turning to innovation.
    Alternative finance supervisors see fraud, capital loss and money laundering as significant risks. Enforcement cases are also common, particularly in unregulated ECF and ICO sectors. Regulators are also looking to more innovative solutions to overcome these limitations in regulation and supervision. Among respondent regulators, 22 per cent have created regulatory sandboxes, 26 per cent have innovation offices and 14 per cent have active RegTech/SupTech programmes.
  • Alternative finance regulation needs better support and a stronger global evidence base.
    To design regulations for alternative finance, regulators have thus received support from a wide range of sources. Most common is for regulators to be supported by multilateral institutions such as various development banks (23 per cent), followed by their peers, for instance, through associations of financial regulators (17 per cent). Nevertheless, 77 per cent of regulators would like more support. Comparing how often sources of support are currently available and desired, there are sizeable gaps. The gap appears larger in the case of support from academics: 13 per cent have received this, but 61 per cent would like to.
  • Emerging-market regulators highlighting new regulatory objectives in regional clusters.
    Most regulators in Sub-Saharan Africa, Latin America and the Caribbean now have statutory inclusion objectives, while regulators in Latin America are more likely than their peers elsewhere to have competition objectives. Regulators in lower income jurisdictions are twice as likely as those in high income jurisdictions to be tasked with supporting governments’ economic policies (42 per cent vs 20 per cent), and those in Sub-Saharan Africa are about three times as likely (64 per cent).
  • After a slow start, most regulatory changes in alternative finance are now taking place in lower-income jurisdictions and emerging markets.
    Lower-income jurisdictions are between three and four times less likely than high income ones to already regulate alternative finance activities (13 per cent versus 36 per cent for P2P; 19 per cent versus 67 per cent for ECF; 10 per cent versus 42 per cent for ICOs). However, lower income jurisdictions are catching up in some areas: they are almost three times as likely as high income ones to review their regulatory frameworks for P2P lending (43 per cent vs 16 per cent). Most jurisdictions in Latin America and the Caribbean are planning changes to their ECF or ICO regulations, and most jurisdictions in Sub-Saharan Africa are reviewing their ECF or P2P regulatory frameworks.
  • Aligning multiple regulators might be challenging for regulators in lower-income jurisdictions.
    The regulators that we surveyed in lower income jurisdictions normally do not have explicit statutory mandates for regulating online alternative finance activities (35 per cent vs 64 per cent for regulators in high-income jurisdictions). Therefore, their views of the sectors’ risk profiles and supervisory challenges are still evolving. They also reported a particular challenge in co-ordinating regulatory and supervisory work in ‘multi-peak’ jurisdictions with multiple regulators responsible for same activities.
  • Higher and lower income jurisdictions tap into different expert networks.
    There are significant differences in how regulators in higher and lower income markets access external support. Regulators in lower income markets are slightly less likely to benefit from advice and input from their peers than those in higher jurisdictions (19 per cent versus 26 per cent). The similar pattern can be seen in relation to support from academics (12 per cent v 23 per cent). Regulators from lower income markets are, however, more likely to obtain support from multilateral organizations (34 per cent versus 16 per cent).
  • Lower income jurisdictions need more appropriate regulatory innovation options.
    Lower income jurisdictions are generally less likely to have active regulatory innovation initiatives in place than high income ones. At the global level, the difference is substantial (14 per cent versus 53 per cent for innovation offices, 28 per cent versus 35 per cent for sandboxes and nine per cent v 28 per cent for RegTech/ SupTech programmes). At the regional level, however, the competing influences of legal institutions and policy trends have produced a more mixed picture. For example, regulatory innovation initiatives are rare in Latin America and the Caribbean, while, in Sub-Saharan Africa, a regulatory sandbox is in place or in development in nearly one in three jurisdictions (32 per cent). In some of the resource-constraint jurisdictions, regulatory innovation initiatives such as the establishment of an innovation offices could prove to be a cost-effective option.