World Bank-Cambridge Study Reveals The Impact Of Covid-19 On Financial Regulators

World Bank and University of Cambridge report highlights increasing digitalisation of financial services has accelerated the pace of regulatory innovation during Covid-19

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The World Bank and the Cambridge Centre for Alternative Finance (CCAF) at the University of Cambridge Judge Business School have today jointly published the results of their Global Covid-19 FinTech Regulatory Rapid Assessment Study, which reveals that the priority of fintech regulation and the pace of regulatory innovation have increased amid the global pandemic. This research is supported by the UK Foreign, Commonwealth and Development Office (FCDO).

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Acceleration Of Regulatory Innovation

The study, which gathered responses from 118 central banks and other financial regulatory authorities in 114 jurisdictions worldwide, highlights that the majority of respondent regulators have either accelerated existing regulatory innovation initiatives or introduced new initiatives. For example, 72% of respondents have either accelerated or introduced initiatives on digital infrastructure, 58% have either accelerated or introduced initiatives regarding regtech/suptech, and 56% did so in regard to innovation offices. No surveyed financial regulators reported the cancellation of an innovation initiative due to Covid-19, although around 20% indicated they had delays.

Financial regulators in jurisdictions with higher Covid-19 stringency measures are more likely to have accelerated their regulatory sandbox initiatives (42%) compared to those in lower stringency jurisdictions (33%). Overall, regulators from emerging market and developing economies (EMDEs) are more likely to have developed new initiatives or accelerated planned initiatives.

At the same time, the priority of fintech for financial regulators has either increased, or remained high, in light of Covid-19. In EMDEs, almost two-thirds of regulators said it has increased in priority. Over half of regulators in advanced economies said it has remained high. Central banks are more likely to have increased the prioritisation of their fintech work relative to other financial regulators (65% among central banks vs 38% among other financial regulators).

Financial Regulators Observe An Increased Use In Fintech Products

These regulatory changes are taking place as 60% of respondent financial regulators have observed strong increases in the use, or offering, of many fintech products and services since the outbreak of the Covid-19 pandemic. The study also details that regulators in EMDEs are more likely to have reported increases in the use of digital payments and digital banks.

37% of surveyed regulators have taken at least one regulatory measure specifically targeting fintech sectors or activities. The most salient measures, especially in EMDEs, were directed at digital payments and remittances (65% of respondents in EMDEs), such as waiving transaction fees, partially or in whole, and raising transaction thresholds.

Importantly, the study highlights that financial regulators are taking actions as they see rising risks in the fintech market during Covid-19 concerning cybersecurity (78% referencing as a top three risk), operational risks (54%), consumer protection (27%) and fraud and scams (18%). In particular, 90% of surveyed regulators from advanced economies see cybersecurity as one of the top three increasing risks associated with fintech activities.

Although 80% of surveyed financial regulators felt that they have been resilient and adaptable in their response to the challenges of Covid-19, they also identified key internal challenges when it comes to the regulation and supervision of fintech activities. Most common are challenges in performing core regulatory functions (e.g. on-site inspections of firms) (49% overall, and 65% of respondents from advanced economies), coordination with other domestic agencies (39%), access to accurate and timely data (29%), increased demand on resources (29%), and restricted access to essential information or technology (28%). Regulators in jurisdictions with more stringent Covid-19 measures are more likely to have indicated that domestic coordination is challenging (46% vs 34%).

Benefits From Skills Development And Technical Support

To support their work on fintech in light of Covid-19, financial regulators considered they would benefit most from skills development (80%) and technical support (67%). This study also detailed lessons learned and future considerations that were shared by responding regulators. These include experimenting with nimble measures, facilitating regulatory-industry engagement and knowledge transfer among regulators in the short-term, as well as strategically strengthening regtech/suptech capabilities and supporting the transition to digital infrastructure in the long run.

“This research was undertaken in order to better understand the experiences of regulators as they face the impact of Covid-19 and increased utilisation of digital financial services and fintech,” says Caroline Freund, Global Director of Trade, Investment and Competitiveness at World Bank Group. “The findings show that Covid-19 has in many cases accelerated policies and programmes that support a shift to digital finance, such as innovation offices and regulatory sandboxes.”

“Covid-19 is accelerating the change in the way that people interact with financial services and it has led to unprecedented demand from developing countries to progress their transition to secure and inclusive digital finance,” says James Duddridge MP, the UK’s Minister for Africa at the Foreign Commonwealth & Development Office, which supported this study. “I trust that this report will inform and inspire countries around the world, help support their fintech regulatory strategies and encourage greater collaboration across jurisdictions.”

Global Challenges Require Global Efforts

“Global challenges such as Covid-19 require global efforts and local solutions,” says Bryan Zhang, Executive Director and Co-founder of the CCAF. “We hope that the global regulatory community will find this empirical study immediately and practically useful in facilitating policy learning, formulating regulatory innovation initiatives and informing evidence-based regulation, both during the pandemic and beyond.”

“Covid-19 has been catalytic in pushing fintech up the agenda for financial regulators and is affecting regulatory approaches, practices and processes,” says Philip Rowan, Lead in Regulatory Innovation at the CCAF. “The increasing digitalisation of financial services will require parallel innovation and transformation in financial regulation and supervision, encompassing not only technology but also changes in mindset and culture.”