Cambridge: Global Regulator Survey Results – Regulation of Alternative Finance is Key to Make Sector Safe to Scale for the Masses

Crowdfund Insider | | Oct 21,2019

coins and tokens - Cambridge:  Global Regulator Survey Results - Regulation of Alternative Finance is Key to Make Sector Safe to Scale for the MassesThe Cambridge Centre for Alternative Finance (CCAF), part of the Judge School of Business at Cambridge University, has partnered with the World Bank to publish a report on the global regulation of alternative finance and innovative Fintech firms. According to the new report, the regulation of alternative finance will increase significantly over the next two years, as indicated by a global survey of 111 regulatory jurisdictions.

Equity Crowdfunding, Peer to Peer Lending & Initial Coin Offerings

As various forms of alternative finance emerge, typically regulators are slow to update or create new rules as they research and dissect digital services. More specifically, access to capital platforms such as equity crowdfunding, peer to peer (marketplace) lending and initial coin offerings (or token offerings), have digitized investment opportunities and the capital-raising process. These three types of finance are the focus of this report. The CCAF study seeks to better comprehend alternative finance via empirical information gleaned from regulators and other public authorities.

Alongside AML/KYC requirements, regulators’ main priorities are said to be:

“… protections against misleading promotions or the misuse of client money. Depending on the activity in question, between 93% and 100% of regulatory frameworks impose requirements in relation to the clarity and fairness of promotions; between 100% and 88% impose sector-specific AML/KYC requirements, and over 80% impose the segregation of client assets, where applicable.”

While regulators and other policymakers see the potential for new forms of finance they simultaneously understand the need to better regulate the sector for the “mass market” including individuals and mid to small businesses (MSMEs).

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CCAF explains:

“Despite a boom in alternative finance regulation since 2015, the relevant activities are still not formally regulated in most jurisdictions – only 22% of jurisdictions formally regulate P2P lending, as opposed to 39% for ECF [equity crowdfunding] and 22% in the case of ICOs [initial coin offerings]. Where these activities are regulated, some jurisdictions apply to them pre-existing regulatory frameworks (e.g for securities). More often, they are subject to bespoke regulatory frameworks, particularly in the case of P2P lending (12% of jurisdictions) and ECF (22% of jurisdictions).”

While not the norm today, CCAF predicts that by 2021 most jurisdictions will have bespoke rules for investment crowdfunding and over a third will have new rules for peer to peer lending and ICOs.

Creating new rules or updating old ones is not always an obvious task. Regulators, as one would expect, look towards other jurisdictions to gauge and compare rule-making progress and development.

While fraud and capital loss are big concerns, regulators frequently lack the expertise and other resources to move quickly and better regulate. Innovative policy approaches have helped in their task. CCAF states:

“Regulators are thus looking to more innovative solutions to overcome these limitations in regulation and supervision. Among respondent regulators, 22% have created regulatory sandboxes, 26% have innovation offices and 14% have active Regtech/Suptech programs. Based on regulators’ responses, the number of sandbox and Regtech/Suptech programs could double and triple respectively in the coming years. In terms of sheer numbers, it seems that innovation offices that have the most quantifiable impact to date, having assisted twelve times as many firms as sandboxes – over 2,100 in total, against just 180 for sandboxes. However, proponents of the sandbox might argue that for particular ‘policy-testing’ orientated sandboxes, the purpose is not to increase the number of innovative firms supported but to facilitate policy learning, design, and review.”

 

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potential impact of altfi - Cambridge:  Global Regulator Survey Results - Regulation of Alternative Finance is Key to Make Sector Safe to Scale for the Masses

Cambridge Centre for Alternative Finance | Oct 2019

Cambridge regulating alternative finance 1 - Cambridge:  Global Regulator Survey Results - Regulation of Alternative Finance is Key to Make Sector Safe to Scale for the Masses

Highlights from the report

  • Alternative finance is still typically unregulated – but bespoke regulation is catching on. Despite a boom in alternative finance regulation since 2015, the relevant activities are still not formally regulated in most jurisdictions – only 22 per cent of jurisdictions formally regulate P2P lending, as opposed to 39 per cent for ECF and 22 per cent in the case of ICOs. More often, they are subject to bespoke regulatory frameworks, particularly in the case of P2P lending (12 per cent of jurisdictions) and ECF (22 per cent of jurisdictions).
  • The potential of alternative finance speaks to a new set of regulatory objectives.
    Policymakers globally are keen to explore the promise of alternative finance. A clear majority are optimistic about its potential to improve MSMEs' and consumers' access to finance (79 per cent and 65 per cent respectively) and stimulate competition in financial services (68 per cent). Such expectations chime with regulators' emerging priorities, as many now have statutory objectives to support financial inclusion, economic policies or competition. While regulation is not the norm today, by mid-2021 most jurisdictions will be regulating ECF and more than a third intend to regulate P2P lending and ICOs; bespoke frameworks will likely become even more common.
  • Benchmarking drives global regulatory change.
    Regulatory benchmarking is used by more than 90 per cent of regulators when reviewing alternative finance regulation, and lessons learned from other jurisdictions have prompted changes in regulation more frequently than any other trigger (56 per cent to 66 per cent of regulators, across the three activities). The most benchmarked-against jurisdiction is the UK, followed by the USA and Singapore, but emerging markets such as Malaysia, the UAE and Mexico also rank among the top 10.
  • Alternative finance regulation is about making the sector safe at scale.
    Alternative finance regulation seeks to make the sector fit for the mass market, including both individual investors and MSMEs. Ensuring liquidity or minimising the potential for capital losses do not appear to be prioritized over those goals. This may be an indication of how regulators interpret their consumer protection mandates in relation to alternative finance.

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  • Alternative finance regulation isn't 'light touch'.
    There is little evidence yet of regulators purposefully creating light-touch regulatory frameworks for alternative finance. If anything, purpose-built regulatory frameworks tend to have more obligations in place than pre-existing ones – out of 20 potential obligations examined in the survey, the average bespoke frameworks for P2P lending or ECF featured nine, against five for pre-existing ones. For ICOs, the balance was five versus three. They tend to prioritise checks on investor exposure, rigorous due diligence on fundraisers, client money protection and appropriate online marketing standards.
  • As supervision stretches their resources, regulators are turning to innovation.
    Alternative finance supervisors see fraud, capital loss and money laundering as significant risks. Enforcement cases are also common, particularly in unregulated ECF and ICO sectors. Regulators are also looking to more innovative solutions to overcome these limitations in regulation and supervision. Among respondent regulators, 22 per cent have created regulatory sandboxes, 26 per cent have innovation offices and 14 per cent have active RegTech/SupTech programmes.
  • Alternative finance regulation needs better support and a stronger global evidence base.
    To design regulations for alternative finance, regulators have thus received support from a wide range of sources. Most common is for regulators to be supported by multilateral institutions such as various development banks (23 per cent), followed by their peers, for instance, through associations of financial regulators (17 per cent). Nevertheless, 77 per cent of regulators would like more support. Comparing how often sources of support are currently available and desired, there are sizeable gaps. The gap appears larger in the case of support from academics: 13 per cent have received this, but 61 per cent would like to.
  • Emerging-market regulators highlighting new regulatory objectives in regional clusters.
    Most regulators in Sub-Saharan Africa, Latin America and the Caribbean now have statutory inclusion objectives, while regulators in Latin America are more likely than their peers elsewhere to have competition objectives. Regulators in lower income jurisdictions are twice as likely as those in high income jurisdictions to be tasked with supporting governments' economic policies (42 per cent vs 20 per cent), and those in Sub-Saharan Africa are about three times as likely (64 per cent).

Download the 84 page PDF Cambridge / World Bank report --> Now

 


NCFA Jan 2018 resize - Cambridge:  Global Regulator Survey Results - Regulation of Alternative Finance is Key to Make Sector Safe to Scale for the Masses The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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