2013/SFOM11/WKSP/010 Session 3 Legal and Regulatory Framework to support Financial Inclusion and Infrastructure Submitted by: World Bank Workshop on Financial Inclusion Manado, Indonesia 23-24 May 2013
Legal and Regulatory Framework to support Financial Inclusion and Infrastructure Massimo Cirasino, Manager, Financial Infrastructure and Remittances May 24, 2013 APEC Workshop on Financial Inclusion, Manado, Indonesia www.worldbank.org/financialinclusion www.worldbank.org/paymentsystems
Financial Inclusion : universal access for individuals and SMEs, at a reasonable cost, to a wide range of financial services, provided by responsible and sustainable institutions INDIVIDUALS/MICRO-ENTERPRISES SMALL AND MEDIUM ENTERPRISES Credit Consumption smoothing Investment in human development (health, education etc.) Savings Cushion in case of shocks Low risk source of self-financing Insurance Risk management tool for managing shocks Payments Electronic/innovative retail payments, Government payments (including Benefits Transfers) and remittances Financing for working capital and for investment From financial institutions or through supply chain Firms rely primarily on retained earnings (savings) for financing Lowers risk of business activity Firms rely on payments for efficient, low cost, safe transactions Positive correlation for credit for SMEs/firms but more mixed results for individuals/households. Impact of other financial services likely positive for both individuals and firms but more systematic evidence needs to be gathered clearest positive link is for savings Further research needed to establish causality on poverty and growth 2
Public Sector: enabling legal framework/infrastructure, transactions volume Private Sector: innovation, investment, financial service delivery Regulatory reforms can stimulate FI: Prioritized and sequenced reforms, informed by data and diagnostics Reforms can cover: non-bank financial institutions, insurance, consumer protection, microfinance, factoring, payment systems, credit reporting Brazil: Financial Inclusion Enabling Framework Government/Regulator actions were informed by survey data and analysis, and included: correspondent banking (use of agents) was permitted banks were encouraged to provide simplified current & savings accounts call centers for consumer protection were introduced This led to a dramatic expansion of financial service access points, with every municipality now covered. Governments can accelerate FI through G2P payments: Only 25% of LICs process cash transfers and social benefits electronically Challenges to making payments electronically include: delivery mechanisms, account opening restrictions, financial literacy/consumer protection Bolsa Familia grant delivery (Brazil) cash payments converted to electronic payments (significant cost savings) cash transfers of less than $45 to 12.4m recipients 82% cost reduction 14.7% 2.6% Before After [Cost of delivery as % of total] 3
Financial Consumer Protection & Financial Capability critical for fast and beneficial growth in FI Access to finance alone does not necessarily lead to beneficial usage. Consumers need to have the knowledge and confidence to be able to take advantage of improved access to financial services, and to be protected from misconduct and fraud. Financial Capability Knowledge (Literacy), Attitudes, Skills, Behaviors Access to Financial Services Knowledge & Actions only effective if suitable financial services are available Financial Consumer Protection Regulatory Framework & Enforcement, Market Conduct Consumers able to access and benefit from Financial Services Awareness, Informationavailability Dependent on Disclosure, Business Practices, Transparency 4
Transformational change is now possible Increasing data availability for evidence-based policy making Focus on policy, regulations and financial infrastructure to accelerate private sector innovation, investment Global consensus on the importance of FI leading to country commitments to action New country data available across countries: Global Findex, Global Payments Systems Survey, Financial Consumer Protection & Literacy Surveys G20 Financial Inclusion Indicators Payments systems in place Mobile phones widely available Banking correspondents enabled by Points of Sale, regulations Credit Reporting Systems improved G20 priority since 2008 WB engagement with Standard Setting Bodies Alliance for Financial Inclusion (AFI) - network of regulators and other agencies from over 80 countries 38 country commitments to improve Financial Inclusion Conditions in place for rapid improvements in Financial Inclusion New Business Models now viable 5
Public Sector Financial Actions Inclusion to promote Strategy: Financial Public Sector Inclusion actions POLICIES AND REFORMS PROMOTING FINANCIAL INCLUSION REGULATORY & SUPERVISORY REFORMS FINANCIAL INFRASTRUCTURE PUBLIC INTERVENTIONS Introduction of low income bank accounts Competition Framework, Bank/NBFI licensing Consumer Protection Frameworks, Dispute Resolution Systems Regulatory & Supervisory Frameworks for Micro/SME finance, Factoring, Leasing, Microinsurance... Enable use of agent networks for delivery of FS Legal framework for electronic payments, including e-signature law Proportionate regulation/supervision of non-bank deposit-taking FIs Collateral Frameworks: Movable Collateral Registries, Collateral Law Credit Information/Reporting Framework Payments Systems Development ID schemes to facilitate bank account opening and financial transactions Appropriate accounting and auditing requirements for SMEs Partial Credit Guarantee Schemes Apex Facilities Financial Awareness, Market Transparency G2P Payments, CCTs linked to financial accounts Platforms to expand access to supply chain finance for MSMEs 6 6
Regulatory Framework to Promote Financial Eligibility of Poor Households and SMEs Three Illustrative Examples Leasing Mobile Money Credit Reporting 7 7
Regulatory and Supervisory Frameworks Enabling Regulatory Frameworks for Alternative SME Finance Products: Leasing A legislative framework for leasing should Clarify rights and responsibilities of the parties to a lease Clarify the rights of lessors and lessees under bankruptcy. Remove contradictions within the existing legislation Ensure tax rules are clear and neutral Create nonjudicial repossession mechanisms 8 8
A conceptual framework for mobile money Mobile money is a confluence of three independent innovations, two of them already well-established retail payments concepts: E-Money Prepaid Payment Product where the underlying funds are stored on a device (e.g. chip card), or in the system of the issuer (e.g. PayPal) which is then accessed through various channels for example using a card or at the internet etc. In some jurisdictions the issuer need not be a bank, as the product is not deemed to be a deposit product. <<Europe and many countries have had this for at least a decade>> Rapid spread of mobile telephony (incidentally mostly using prepaid connections as opposed to post paid), coupled with inherent capability to exchange data and basic computing capability. <<This is akin to the development of internet as a channel for exchange of payment information>> Concept of business correspondents/agents leveraging existing businesses/shops as a channel to offer payment services using their own cash/flow, leveraging technology like those developed for card payments at the point of sale. <<Brazil introduced this many years ago>> 9 9
World Bank-CPSS General Principles for International Remittance Services A valid framework for Mobile Money as well GP 1: Transparency & consumer protection The market for remittance services should be transparent and have adequate consumer protection GP 2: Payment system infrastructure Improvements to payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged GP 3: Legal & regulatory environment Remittance services should be supported by a sound, predictable, non-discriminatory and proportionate legal and regulatory framework GP 4: Market structure and competition Competitive market conditions, including appropriate access to domestic payments infrastructure, should be fostered in the remittance industry GP 5: Governance & risk management Remittance services should be supported by appropriate governance and risk management practices Responsibility of Remittance Service Providers to support implementation Responsibility of regulators and public authorities to ensure implementation 10 10
World Bank General Principles for Credit Reporting Systems : leveraging credit information for responsible finance for households and SMEs GP1: Credit Reporting systems should have relevant, accurate, timely and sufficient data including positive- collected on a systematic basis from all reliable, appropriate and available sources and should retain this information for a sufficient amount of time GP2: Credit Reporting systems should have rigorous standards of security and reliability and be efficient GP3: The governance arrangements of credit reporting service providers should ensure accountability, transparency and effectiveness in managing risks associated with the business and fair access to the information by the users GP4: The overall legal and regulatory framework for credit reporting should be clear, non predictable, non discriminatory, proportionate and supportive of consumers rights. The legal and regulatory framework should include effective judicial or extra-judicial dispute resolution mechanisms GP5: Cross-border data transfers should be facilitated, where appropriate, provided that adequate requirements are in place 11 11
World Bank General Principles for Credit Reporting Systems : leveraging credit information for responsible finance for households and SMEs: main areas to be covered Establishment Element Definitions Applicable law Entry requirements Exit measures Data collection Permissible purpose Confidentiality Use of information Description Interpretation of certain terms related to credit reporting Define scope and limit liabilities including cases where more than one jurisdiction is involved Criteria to provide the service such as licensing, registering, technological capacity, staff skills and reputation Criteria to ensure continuity of the service Scope of data (including type of participants, negative or positive information, publicly available information and method of contribution) Defines the restriction to access information regarding purpose and users Provide criteria to use information Defines controls for adequate use of information 12 12
World Bank General Principles for Credit Reporting Systems : leveraging credit information for responsible finance for households and SMEs: main areas to be covered Operation Compliance Element Definitions Data Quality Security Obsolescence Enforcement Dispute Settlement Oversight Description Interpretation of certain terms related to credit reporting Lawful and fairness, accuracy, up to date and completeness of data Design criteria to ensure protection against data breaches, data loss and data corruption Time and calculation method for data to be distributed Ensure compliance with law and regulation Mechanisms and procedures to dispute settlement including limitation of liability and libel actions Attribution of the role to specific capable authority and definition of scope 13 13