Four foundational financial regulatory objectives underpin a robust policy approach toward financial market protection and must be universally ensured in order to achieve effective governance of BFTs internationally.
1.1 Financial stability is core to financial regulation.
It can be understood in both negative (the absence of a systemic risk”. BigFintechs, due to their size, extensive use of innovative technologies and both innovative and interconnected models, pose new types of threats that require careful consideration.
1.2 Ensure that finance is available at appropriate cost to individuals, businesses, and government.
Market efficiency and fair competition support economic growth and employment, and underpins financial inclusion and sustainable development. This objective is also concerned with the potential negative consequences of dominance in market segments or the entire financial system. Regulators must adequately regulate BigFintechs with significant presence in both financial and non-financial spaces and prevent firms from becoming too-big or too-connected to fail.
1.3 Protect consumers and investors from abuse by financial institutions
Consumer and investor protection fosters confidence in the financial system and reduces financial crime. As financial markets become more sophisticated and more aspects of our lives go digital, regulators must adapt and provide certain protections to online theft, fraud, data protection, cyber security. This is also true in relation to BigFintechs, whose core businesses often involve some level of data exploitation and monetization.
1.4 Ensure market integrity requires preventing criminal and terrorist use of the financial system.
Money laundering and terrorism financing can have destabilizing effects in economies as they fuel illegal activity. In developing countries, this can fuel corruption and stifle economic growth as funds are diverted from legitimate, welfare-enhancing public spending initiatives.
Regulatory interventions should be targeted, with mechanisms that allow for rapid review and adaptation. The need for a reflexive and iterative approach stems from the rapidly developing technologies used by BigFintechs and variations in societal capacity to engage with that technology.
2.1 Assess societal capacity to oversee and manage BigFintech activities
BigFintech activities, innovation and growth are largely driven by ABCD technologies (Artificial Intelligence, Blockchain, Cloud computing, Data) and produced by global supply chains, geographically dispersed labour and considerable capital. Developing countries often have less societal capacity (collective capacity of regulators, users & consumers, and infrastructure) to manage the scale and impact of BigFintech activities, compared to more advanced economies in which BigFintechs may be domiciled.
2.2 Corollate substantive regulations with mechanisms that allow for reflexivity and iteration.
Deploy an approach to policy and regulation that includes an appropriate mix of substantive regulation coupled with mechanisms that give authorities flexibility to reflect on and adapt to developments. Adopt relevant regulations that promote public welfare through fair competition, financial stability and market integrity with built-in correlations to reflexive and iterative regulatory mechanisms.
2.3 Embed feedback loops into the process of developing policy, regulation and capacity
There are several mechanisms that regulators can use to embed feedback loops into their process as they develop policy, regulation, and capacity. These include innovation hubs, regulatory sandboxes and transnational regulatory networks.
2.4 Enhance financial inclusion and promote sustainable development through knowledge exchange
Innovation hubs, regulatory sandboxes and transnational regulatory networks can facilitate collaboration between regulators and the technology firms and support industry innovation. Exchange programmes could provide developing countries with opportunities to learn about more mature or advanced regulatory practices, policies, and procedures. Developed-country regulators would be provided with opportunities to learn about innovative developments in developing countries, and better consider the impacts of their integration into global financial markets and transactions.
2.5 Build fundamental digital infrastructure through Regtech and Suptech
As regulatory capacity grows, there will be more room to build fundamental digital infrastructure through Regtech and Suptech using their increasingly sophisticated capabilities. Implementing regulation through technology requires resources, trained staff and sophisticated digital infrastructure. The combination of infrastructure and technology will allow for better and more efficient risk identification and general exercise of regulatory functions. Regtech can therefore enable the development and deployment of ABCD technologies to the advantage of developing-country regulators.
Considering the numerous instances of damage to the environment and/or society in developing countries caused by large transnational enterprises, adequate due diligence, reporting and disclosure will ensure a minimum level of transparency and accountability for BigFintech operations.
3.1 Apply transnational standards of responsible business conduct to BigFintechs
Reliance on BigFintech home state regulation to guide and oversee activities in developing countries presents several challenges in contexts of weaker governance, rule of law issues, conflict and fragility. Consider the direct application of transnational standards of responsible business conduct on BigFintechs, including the United Nations ‘Guiding Principles on Business and Human Rights’, the OECD ‘Guidelines for Multinational Enterprises’ and the United Nations Global Compact.
3.2 Establish ESG/SDG due diligence and reporting frameworks to enhance business conduct
Due diligence involves implementing appropriate risk assessment and management systems (policies, procedures and processes) across a company’s operations. BigFintechs should be required to disclose and report on the results of their due diligence exercises, highlighting salient environmental and social risks and their plans to manage or remediate any consequential negative impacts.
Match the direct application of standards to BigFintechs proposed in principle 3 with appropriate oversight and enforcement mechanisms that could benefit from Regtech and Suptech solutions.
4.1 Deploy oversight and enforcement mechanisms at various levels of BigFintech operation
The complex ecosystem of BigFintech actors and activities requires oversight and enforcement mechanisms at various levels of operation and impact. Regulators and policymakers must consider appropriate features of form and function to guide what they are trying to achieve, how they should organize themselves to do so, and who will be important in helping them do so.
4.2 Choose a configuration that offers flexibility to develop appropriate regulation and oversight mechanisms
In selecting the form regulation and oversight mechanisms will take, various configurations are possible and should be weighed in light of geographic, cultural, political and economic considerations. Configurations can be Entity-based, Intra jurisdiction, Regional or Inter-regional and Global.
4.3 Collaborate with the private sector to determine and implement appropriate regulatory functions
In terms of regulatory function, the regulator’s objectives matter. These functions, including third-party audits, dispute resolution and remedies, can be conducted by or in collaboration with the private sector. The OECD and its National Contact Point mechanism serves as a useful example of potential regulatory configurations and associated functions.
4.4 Increase engagement from developing country regulators in standards-setting and regulatory processes at all governance levels
The lack of developing-country regulator participation in international regulation forums and standards-setting bodies limits their ability to determine the rules by which international economic actors must abide when they operate on a transnational basis. International regulators should ensure that developing-country regulators are participating in their standards-setting forums because of the rapidly growing and innovative firms emerging from developing economies which could, in time, pose risks to international financial stability.
To enhance the responsible conduct of BigFintechs and to better support the attainment of the SDGs, governance frameworks and initiatives should require a board-level commitment of BigFintechs to incorporate the SDGs into business plans and models, particularly when operating in developing countries.
5.1 Pursue greater multi-stakeholder coordination and collaboration
Regulators carry heavy burdens and need the private sector to take responsibility for their impacts and assume their roles in facilitating sustainable development. Through a process of education, due diligence and disclosures, BigFintechs can support the attainment of the SDGs by developing an awareness of their impacts on the SDGs; promoting positive and mitigating negative impacts on attaining the SDGs; and integrating these two activities into their core business models and operations.
5.2 Engage BigFintechs at the board level
Board-level engagement enables action by individuals with the authority to commit resources and drive the agenda. This senior level of engagement also communicates to stakeholders that the company takes the matter seriously. In the drive towards sustainable development, concerted and collaborative action by all stakeholders is pivotal.
5.3 Generate opportunities for BigFintechs to support the achievement of the SDGs
While Principle 3, ‘Fostering responsible actors’ takes on more of a compliance and regulatory tone, this principle aims to generate an opportunity for BigFintechs to align with the SDGs, which are aspirational and actionable. While the SDGs seek to drive positive impacts and outcomes broadly, they also represent opportunities for corporations - a win–win scenario worth promoting by devising a principles-based approach to the governance of BigFintechs.
Recommendations to support implementation of the Principles
The UNDP-UNCDF principles based approach to BigFintech governance calls for a more ambitious and convergent approach to how BigFintechs’ impacts are managed across regulatory domains. The Principles laid out in the study promote collaboration between regulators from different domains and markets, more corporate accountability, proper enforcement and oversight as well as greater overall commitment to sustainable development. Their uptake is critical to reaching many of the SDGs.