Balancing Inclusion, Integrity and Stability
A Proportional Approach to Regulation that Balances Financial Stability, Integrity and Inclusion is Increasingly Important
Many members of AFI include financial inclusion as part of their primary mandate or consider it an important objective in expanding their financial sectors to enable inclusive growth and poverty reduction.
Global standards for financial integrity and stability provide guidance to regulators and policymakers to design and implement financial regulatory frameworks that minimize risk of abuse related to money laundering and the financing of terrorism, and ensure the safety and soundness of the financial system.
However, global standards can pose a challenge to developing and emerging countries which need to innovate and take advantage of new financial products and services to extend the reach of the financial system. Global standards that do not allow sufficient room for innovation, or which do not allow for proportionate application, can have unintended consequences with an adverse impact for financial inclusion. A further challenge can be over compliance, where national regulators and/or the private sector may adopt overly conservative approaches due to lack of understanding of how practically to apply the proportionality permitted by the global standards. As Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr., has stated:
“While global standards are sufficient to allow proportionate application, they were originally not established with financial inclusion as a consideration; which can lead countries to adopt conservative approaches that limit innovation. The SSBs need to learn, in parallel with us, how to manage emerging and evolving risks that financial inclusion brings.”
In June 2014, AFI members created the Global Standards Proportionality Working Group (GSPWG) as a successor to the Financial Integrity Working Group (FINTWG), to provide a platform to review and discuss barriers to financial inclusion resulting from implementation of global standards with a view to identify and propose solutions that meet the challenge of balancing financial inclusion, integrity and stability to achieve the safety and soundness of the financial sector.
Over a four-year period, the FINTWG was instrumental in documenting the related barriers and solutions, which were shared with the Financial Action Task Force (FATF) and the Basel Committee on Banking Supervision (BCBS). It has developed a Guideline Note for regulators to effectively implement risk-based frameworks to AML/CFT that aim at balancing integrity and inclusion.
The GSPWG represents an expansion of the working group’s mandate to also consider issues related to the implementation of other global standards such as those set by BCBS, the International Association of Deposit Insurers (IADI), the International Association of Insurance Supervisors (IAIS), the Committee on Payment Settlement and Systems (CPSS) and the Financial Stability Board (FSB).
Under this new mandate, the GSPWG has initiated three key works streams which focus on (1) Implementing Proportionality in Practice, with a conference organized on this theme held in Kuala Lumpur in May 2015, resulting in the adoption of the KL Resolution on Proportionality in Practice (2) Assessing the impact of De-Risking by financial institutions on financial inclusion, and convene stakeholders to identify practical challenges; and (3) Developing proportionate regulatory frameworks for non-bank financial institutions which mitigate the risk of shadow banking whilst promoting innovation, in line with the “Moscow Resolution on Financial Inclusion on Shadow Banking and Financial Inclusion” adopted by AFI members in November 2015.
GSPWG further provides technical support to AFI’s Global Standards Committee, which was established in April 2014 to provide oversight to AFI’s initiatives on global standards proportionality and to facilitate a high-level dialogue with the SSBs.