The importance of regulating in the FinTech s world for the protection of consumers Călin Rangu Business Conduct Director, Authority of Financial Supervision Vice-president InsurTech Task Force, EIOPA-European Insurance and Occupational Pensions Authority
Summary 1. Who are the customers, and what to protect 2. How to regulate and supervise the technological innovation in financial sector
Who likes tech changes? Customers, they have needs for better services Digital customers, more and more eager technology consumers The companies themselves, partially, for sustainable competitive advantage need IT staff or tech companies, where the focus is on technology, and less on technology as a real business factor 3
But what for? Personal well-being the goal of finance, to assure prosperity and development Customer satisfaction for a better and qualitative experience Financial inclusion more people to have access and lower prices Cost reduction automate, standardization Profit increase business enabler Market share distribution channels, customer satisfaction For compliance Solvency II, IDD, MiFid, PRIPs etc. 4
Opportunities and challenges Personalised products and services based on own needs and characteristics Financial inclusion or exclusion? Price optimisation: fair treatment of consumers? Better customer experience Empowerment Addresses information asymmetry/transparency Enhanced competition: reduced prices Risk mitigation and prevention Opportunities for consumers Challenges for consumers Data accuracy and spurious correlations Privacy issues and data ownership Non-digital population left behind Less comparability of (individualised) products and prices Supervision of algorithms Cost efficiency Enhanced risk assessments Regtech Targeted and individualised advertising Improve their customer s experience Direct access to customers (disintermediation) Fight against fraud Opportunities for industry Challenges for industry Source: EIOPA New competitors: defeat or ally? IT Flaws Cyber risk Access to data: data oligopolies? Employment Legacy issues Insurance business model to be rethought? Fragmentation of the value chain5
Challenges for financial companies Today s challenges for financial leaders: Regulations, Market, and Technology We will speak about information technology innovations. But.. Prediction is very difficult, especially about the future. 6
What does tech change? 7
Ex: Big Data impacts all stages of the insurance value chain Product design and development Usage-based insurance products (e.g. car telematics or health wearables) Tailor-made product and services New products: cyber insurance products Pricing and underwriting Enhanced risk assessments New claims drivers and predictive models New non-risk based pricing techniques Sales and distribution Automated advice Disintermediation of sales processes Increased frequency and customer interaction Gamification Post-sale services and assistance Smartphone applications 24/7 service, accessible form any location Chat boxes and artificial agents Geolocation and personalised warnings in case of flood, storm, hail, etc. Claims management Enhanced fraud analytics Accurate information about the accident and its dynamics (e.g. photos, geolocation etc.) Picture recognition (e.g. car damage or facial recognition) and automated loss adjusting Source: EIOPA 8
What does tech inspire? New business models + Greater risk to disruption + Cybersecurity + Increased complexity + New threats + Many unknowns 9
Consumers Protection For All Life Cycle Age Childhood Teenage Adult Retirement Events in life Games Wishes Wishes Studies Fun Family House Jobs Holidays Retirement Nephews Unexpected events in life include losing the job, accidents, illness - - - - - - - - Common elements importance of financial planning - - - - - - - - - Incomes - - Expenses - - Risk - - Responsabilities - - Wishes - Authorities should protect consumers, to fulfil their well-being, classical or digital!
What rights do we protect? the right to be informed transparency, to allow access to information of interest in order to adopt rational decisions etc. the right to know their rights and obligations - to provide information dedicated to consumers and to conduct informational and educational campaigns, clear and formulated in a language close to them (simple and concise). the right to negotiate and pay a fair price, to compare prices between prices - ensuring that no monopoly or abuse, fraud, lack of transparency, misleading advertising, malpractice, etc. cases appear or unauthorized activities occure. the right to receive assistance - providing assistance to consumers through an accessible and free of cost system. the right to complaint and access to a dispute resolution system - restoring legality and normality situations.
Yin & Yang of consumer protection Preventive actions vs Reactive actions; Prudential Regulation vs Conduct Regulation Classical protection vs Business Conduct Supervision Bottom-to-Top op vstop-to-bottom approach A value chain model applied, by an integrated, functional and efficient organizational framework Smart regulation and supervision starting from innovative public policies and strategies in an innovative new world
Classical sources of consumer detriment interruption of operation and malfunctioning of the systems, cyber-threats lack of processes, poor processes, organizational problems and non-governance product and activity faulty practices, bad POG Processes External events People Systems Legal risks Consumer Detriment internal & external frauds, Conflicts of interest customer treatment, faulty processing of data relating to them conditions for employment and job security, staff profesional development
Sources of consumer detriment generated by financial technologies Financial exclusion Cyberrisks Consumer Detriment Data manipulation, ethics and personal protection issues On-line frauds or legal avoidance Technical issues in operations Perversive information, fake-news
Supervision and Management of risks using technology Analyzing post-loss & causal factors, all faulty events that had a good chance of being prevented or detected if Aggregate, analyze and escalate Key Risk Indicators (KRIs) providing closer to real time information using Innovative technologies for prevention, structured & unstructured data analytics, pattern recognition, AI, etc.
Summary 1. General principles of regulation and supervision of consumer protection 2. How to regulate and supervise the technological innovation in financial sector
How? Creating FinTech HUBs at the level of national authorities A controlled development of the new innovative technological products or services - assure market stability - protect the consumer/user for to
Disruptive Forces managed by FinTech Task Teams at financial authorities level EIOPA and more national authorities set-up FinTech teams to manage topics as: Cyber Risks: to better understand the risks, and the cyber impact new opportunities and challenges that cyber risks imply for the sector a sectorial vulnerabilities analysis potential build-up of risks and consumer protection Big Data: review of the use, seeking to gather empirical evidence on the use of Big Data in areas such as pricing, underwriting, claims management, sales and/or marketing the benefits and potential risks to fair treatment of consumers assessing the boundaries of potential ethical and privacy issues arising from enhanced consumer profiling techniques and more granular risk assessments the impact of Big Data on the availability and affordability of insurance for consumers mitigations and extended active dialogue 18
FinTech Task Forces (2) Convergence on supervision of algorithms - to assess the design and use of algorithms to determine how the functioning of increasingly complex analytical IT tools and processes (e.g. artificial intelligence or machine learning) can be best supervised and/or communicated to consumers. Distributed ledger technology (DLT) / Block-chain: explore the benefits and risks arising from the use of block-chain and smart contracts for financial companies and consumers, assessing possible regulatory barriers preventing the deployment of this innovation. 19
FinTech Task Forces (3) New value chain and business models: Innovation Hub: supervisory challenges arising from the new business models and the possible fragmentation of the value chain. to develop a European Innovation Hub. the increasing collaboration between financial companies and non-regulated firms (data vendors or cloud computing service providers). a structured framework where NCAs and FinTech firms would regularly exchange experiences and provide guidance 20
FinTech Task Forces (4) RegTech: the impact in the context of regulatory monitoring, reporting and compliance assessing how Big Data and other innovative data-analytical tools could be used for supervisory purposes in order to capitalize on the new data-reporting requirements Collaboration with start-ups and other Mapping supervisory approaches to FinTech - establishing efficient and effective supervisory practices. how the principle of proportionality is being applied in practice specifically in the area of financial innovation (e.g. regarding FinTech start-ups such as P2P insurers) identifying possible regulatory barriers to financial innovation entities for their data analysis capabilities 21
ASF Romania InsurTech HUB Romanian Financial Supervision Authority (ASF) set-up an InsurTech HUB OBJECTIVES Presenting the best practices in the field; Stimulating innovative technologies favorable to consumers; developing regulation and supervisory resources and the development of the insurance market; Monitoring of innovative technologies development from the perspective of: the current regulations and those required to be applied in the future; the conduct of companies that promote such solutions and the conduct of entities that use innovation technologies and solutions. Supporting innovative technologies development in a controlled and consumer-friendly manner with the protection of their rights and interests from the perspective of digital identity, dematerialized assets and personal data. 22
ACTIVITIES InsurTech HUB Romania Proposals to support innovative technologies in insurance, including the required regulation; Providing ASF s support to insurance undertakings, technology companies and hubs to understand and enforce the regulation; Supporting the application of innovative technologies; Facilitating collaboration with the insurance / reinsurance market entities to exchange information on technological issues that support better regulation; Publishing information, recommendations. 23
Encouraging responsible innovation at each stage of development Idea stage Promote the generation of ideas Compliance stage Implementation stage Facilitate the process of compliance Test how the idea works in practice Expansion stage Facilitate expansion to all market 24
Idea stage Networks or forums Exchange ideas for applications and initiate research Share emerging trends Facilitate synergies (e.g. incumbents and start-ups) Identify regulatory barriers Brainstorming to solve specific market problems Support units Encourage innovation in a specific area 25
Compliance stage Innovation hubs Support to identify relevant regulation Support in how to comply with regulatory requirements Hub and spoke model Dedicated advisers 26
Implementation stage Regulatory sandboxes THE MAIN REGULATION TOOL Test new ideas in a controlled environment Provide feedback to adapt an idea or a regulation Entry requirements include that an idea is innovative and that the consumers will benefit from it Types of flexibilities offered Temporary license or exemption Non-applicability of certain rules Tailored regulations Consumer protection maintained Suitability rules Access to redress Qualification requirements 27
Challenges Mandate of oversight body How does promoting innovation fit? Keeping up with innovation Knowledge, identifying barriers and how regulations should apply Structural issues Financial institutions-focused regulation, local ownership, paper requirements Institutional culture How to promote a culture of innovation outside of hubs? Consistency Interpretation of regulation, variety of InsurTech Capacity Demand for regulatory support may exceed supply 28
Key to success: Engagement Capacity Resources and networks International approach Consistency Consistency in the application of regulation International cooperation to limit regulatory arbitrage Culture Organizational support and buy-in Adaptability to change 29
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