Peru designs its new fintech regulation
Miluska Gutiérrez, senior associate at Corporate Law and Commercial Contracts, Securities Markets and Banking and Finance departments of Garrigues in Lima.
Financial technology, or fintech, continues to be on the short-term agenda of most regulators. These new technology platforms are continually inciting new concerns, and they have an increasingly greater potential to impact sectors not usually covered by the traditional banking industry.
What IT-heavy financial activities should be regulated, and why?
This is the main question being addressed by the Peruvian banking regulator, the Superintendencia de Banca, Seguros y AFPs (“SBS”), in conjunction with other government agencies such as the Peruvian securities market regulator (Superintendencia del Mercado de Valores, “SMV”) and the Ministry of Economy and Finance (“MEF”). Together, they aim to propose a regulatory framework that promotes innovation and competitiveness among companies that use technology to provide financial services.
During a conference held in May, the SBS made a timely distinction between the different types of fintech companies existing today and provided insight into the agencies’ efforts to design a consistent and supportive regulatory proposal. The SBS differentiated between alternative financing mechanisms, which use enabling technologies (such as cloud processing and online contracting) to offer financial services, and the modalities of crowdfunding that entail financing aspects (equity crowdfunding and crowdlending).
Regulatory proposals are being prepared for each category, with different regulators leading the corresponding initiatives. The SMV, for example, is spearheading regulation for the financial aspects of equity crowdfunding and crowdlending platforms.
Crowdfunding in Peru
In an insightful analysis of different regulations worldwide (2015), the International Organization of Securities Commissions (IOSCO) identified a number of different trends regarding crowdfunding in various countries: (i) crowdfunding is prohibited in certain countries; (ii) crowdlending is not regulated in others; (iii) specific regulation in placed on crowdlending; and (iv) prevailing regulations have been adjusted to allow crowdlending.
Peru falls in the second group described, namely those countries that do not regulate crowdfunding. In contrast to some opinions, this strategy allows the regulator to ascertain how the corresponding platforms work and to identify whether regulating crowdfunding would help lower risk and drive growth in a specific sector (such as fintech).
Following the examples set in the region by Colombia (establishing competitive regulations for fintech companies) and Mexico (with its groundbreaking Fintech Law), the Peruvian government hopes to create a regulatory framework that addresses key financial technology issues.
Lastly, according the Inter-American Development Bank (2017), 46.2% of Peruvian business operators believe that while no specific regulation currently exists, it is indeed necessary.
What is the SBS’s proposal for Peru?
The SBS summarized its proposal as follows: the regulatory strategy calls for selective and targeted development of the sector, as well as regular monitoring of sector companies.
At a conference held last May, the banking regulator clarified that only qualifying business models should be regulated, so that technology can help more people access financial services. In particular, the SBS emphasized that financial regulation should seek to establish a system that can proportionately address the risks arising from the financial activities carried out.
The proposed regulatory model would be a tool to boost the competitive edge of fintech companies.
What about financial inclusion?
The Peruvian government’s proposed regulatory approach is closely aligned with the 2015 National Financial Inclusion Strategy, which sets out country’s financial inclusion targets for 2021. These targets will be measured using standardized tools focusing on milestones and objectives. The primary financial inclusion targets for 2021 relate to greater depth in financial markets, more extensive physical coverage, greater use of digital payment means (in line with the public’s needs) and a reliable and secure financial ecosystem for all citizens. Fintech companies can play a particularly important role in this regard, bringing financial services to people through tools they already use on a daily basis (cell phones, internet and technology in general).
How can this regulation benefit the public?
Fintech companies offer a number of benefits to the financial market as a whole, but they also give rise to certain risks (chiefly, the potential for money laundering and other crimes).
As always, there are some costs when regulating a business model or practice (although these are not analyzed in detail in this document). The greatest cost, and precisely the one regulators are attempting to reduce, is that regulation can discourage certain companies from participating in the sector, and therefore the sector might fall short of its targets.
To offset this possibility, in establishing key regulatory obligations, regulators must take into account the following five aspects: payments, investment, loans, risk data analysis and development of digital services.
The major challenge facing Peru’s government, industry and regulators is to continue ensuring a regulatory environment that allows for and encourages financial innovation, which will ultimately benefit end users. It is important to note that when we speak of regulation, we mean more than just the rules of the game for market participants. Rather, we mean an effective supervisory activity that includes assessing the impact the regulatory proposal will have on the market, in order to verify whether the aforementioned challenge is met.
It is very important for decision-makers to analyze the possibility of establishing “safe spaces” in which innovative new products and services could be pre-authorized for market testing before they are launched. This encourages companies to come up with innovative solutions, given that requirements are less stringent during trial phases, and streamlines the process for testing new fintech business models.
What’s next?
Current players in the Peruvian fintech market are hopeful that the new regulatory framework will eliminate some of the uncertainties they face. They also hope that regulators understand how quickly this emergent industry changes and how innovation is its only constant.
Nevertheless, no one can be sure how the market will react to the regulatory framework ultimately implemented in Peru. Appropriate regulation that provides incentives for this growing sector could spur a faster proliferation of technology platforms offering financial services. If so, the market could react in one of two ways: (i) competition between fintech companies and the traditional financial sector over those individuals that have yet to participate in the formal banking system could spike, or (ii) we could see strategic partnerships between fintech companies and financial institutions, unlocking synergies that ultimately benefit unbanked consumers.