Gaps in the regulatory perimeter
Risks | Possible regulatory approaches |
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Consumers of DFS products may receive less protection than consumers of traditional financial products if there are gaps in the coverage of their country’s existing Financial Consumer Protection regulation and financial sector oversight. This risk applies across DFS products and providers. For example:
Or existing Financial Consumer Protection regulation and supervision may not extend to new DFS providers or products, particularly where institution-based approach is used. |
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Data protection and privacy risks
Risks | Possible regulatory approaches |
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Business models often revolve around the innovative use of big data and alternative data to target consumers for product offerings, assess product applications, or design products.
| Data privacy risks typically involve considerations beyond a financial consumer lens and are ideally addressed through regulatory approaches that go beyond sector-specific regulation. Some regulatory approaches include:
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Consumers not being provided with adequate information
Risks | Possible regulatory approaches |
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The standard risks arising from consumers not being provided with adequate product information can be heightened when digital channels for communication pose challenges to consumer comprehension due to limited space, poor formats, poor user interface, etc. |
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Product unsuitability
Risks | Possible regulatory approaches |
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Fintech and DFS can increase access to riskier or complex financial products to consumers that may lack knowledge or experience to assess or use them properly, leading to greater risks of harm due to product unsuitability. |
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Algorithmic/AI decision-making
Risks | Possible regulatory approaches |
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The use of algorithms/artificial intelligence (AI) for consumer-related decisions is becoming particularly prevalent in highly automated business models. Some potential risks of the use of AI in financial services are as follows:
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Very recently major developments have occurred in development of regulatory frameworks for artificial intelligence that, among other things, seek to mitigate relevant risks. The measures above are some examples of the kinds of approaches being proposed or implemented. |
Conflicts of interest and conflicted business models
Risks | Possible regulatory approaches |
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DFS and fintech-enabled business models can give rise to conflicts of interest in new circumstances not foreseen by regulators or expected by consumers. |
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Fraud and other misconduct
Risks | Possible regulatory approaches |
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Fraud and other misconduct: There are other forms of fraud that can be perpetrated by third party fraudsters who are not related to service providers or platform operators. For example:
Source: CGAP (2017) Risks of loss from fraud or misconduct can be increased by factors such as opaqueness or complexity of platform arrangements and lack of consumer awareness about exposures. |
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Platform / technology unreliability and vulnerability
Risks | Possible regulatory approaches |
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Platform/technology unreliability or vulnerability to external threats can expose consumers to heightened risks of loss and other harm. |
Note: These are in addition to general risk-management and competence requirements. |
Business failure or insolvency
Risks | Possible regulatory approaches |
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Inexperience of new fintech and DFS entrants and riskier or novel fintech-enabled business models can increase the risk of loss of funds from insolvency or business failure. |
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