Why Regulators Must Become Innovators
Finance in the world of digital technology is all about innovation. However, one group of people will need to be more innovative than anyone else: regulators. That’s the message from Patrick Njoroge, Governor of the Central Bank of Kenya. Speaking in a virtual fireside chat as part of the Singapore Fintech Festival, he said regulators had a key role to play. They could use their convening power to bring people and innovators together and foster digital transformation.
“Speaking for regulators, I think we’ve got a bad rap. Yes, regulators are supposed to remain focused on the risks and understand the risks posed by a new product but they absolutely must be agnostic about the technology so to speak,” Njoroge said.
Technology, he said, is everywhere in the financial sector. It’s tempting to get carried away by the latest new thing. However, he called on regulators to remain ‘agnostic’ about technology. Rather than focusing on the tech itself, he said that there were two key considerations which come into account:
1. Maintaining financial stability and the regulator’s mandate.
2. Finding an answer to this question: ‘what is the problem that this product solves’.
“The regulator therefore should not be in the business of pushing down innovation. On the contrary, I think regulators should be the most innovative people of all because they are the ones willing and able to ask the necessary questions and ‘walk the innovation journey’ alongside technology providers,” he said.
Regulators have a challenging job. They face an evolving market with disruption coming from all angles. From AI, to cryptocurrencies, the cloud and mobile banking, technology is changing the way financial services work. Every benefit comes with risks and additional considerations.
Njoroge acknowledged the balancing act regulators must face in protecting customers, while not stamping down on innovation. For example, on know your customer, banks must balance the needs of maintaining security with the risk of financial exclusion.
“On one side of the spectrum you have large financial institutions making millions of transactions and for this a firm really must be stringent on KYC. On the other end of the spectrum, while there are still KYC elements that the provider of e-wallet transactions must be aware of for a street-side fruit seller, these two parties should not be subject to the same level of KYC. It must be risk-based and it should not lead to financial exclusion,” he said.
Innovation through learning
Everyone from banks to regulators has to move fast to keep up. Innovation is everywhere and each type brings with it a host of issues. Njoroge talked up his own country, Kenya, as being pioneers in the use of sandboxes. These have proved critical in allowing regulators to see how innovation works in the real world. He also highlighted the importance of learning from others. Different territories are moving at different speeds, but success in one place, such as Singapore, still provides opportunities for learnings elsewhere.
Information – and its speed of availability - is vital which is why a key component of our global regulatory platform is identifying events and developments from around the world, providing insights into issues associated with every new piece of technology. Staying up to date with the latest developments, understanding the implications of technology and learning lessons from the successes and failures of others will be crucial in helping regulators in the future. The landscape is changing, the rules are evolving, and consequently, regulators will need to be innovators if they are to keep abreast of all these new developments.
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