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HIGHLIGHTS OF THE REPORT ON THE FUTURE OF FINTECH IN NIGERIA
Introduction
In light of the rapid adoption of technology in the financial services sector, the Securities and Exchange Commission (“the SEC” or “the Commission”) spearheaded the development of a regulatory framework for the operation of FinTechs in Nigeria with the inauguration of a FinTech Roadmap Committee (“the Committee”) at the 3rd quarter meeting of its Capital Market Committee (“CMC”) in 2018.
The terms of reference of the Committee were as follows:
The Committee submitted its report titled “The Future of FinTech in Nigeria” (“the Report”) which was formally launched by the SEC on 29th October 2019 at the Nigeria Fintech Week. The Report identifies certain challenges against the growth of FinTechs in the Nigerian capital market and proposes solutions.
Challenges
The following are the challenges identified by the Committee:
The existing regulatory framework in the Nigerian capital market neither provides enough clarity on the role of FinTech companies nor clearly articulates their licensing and compliance requirements. In addition, there is uncertainty on how regulators intend to treat certain FinTech products like crypto assets. This lack of clarity creates uncertainty in the minds of innovators. Another regulatory problem is the length of time it takes to register a FinTech company with the Commission.[4]
The efficiency of every FinTech company is dependent on access to data, and the limited data makes it difficult to identify potential customers, develop applications to meet the specific needs of investors and monitor competition. Access to data is also important for regulators to adopt the use of supervisory technology (SupTech). The Nigeria Data Protection Regulation 2019 will potentially affect FinTech’s access to data, because of the requirement of lawful processing.
FinTechs rely on data, which is vulnerable to attack and misuse. The interconnected financial systems further accentuate the threat of data theft and cybersecurity. If the risk of cyber security is not curtailed, then it may lead to financial instability.
The Nigerian capital market is overdependent on foreign capital for liquidity. Thus, there is a need to grow the domestic contribution as a shock absorber to adverse changes in the market and address the capital flight associated with foreign capital and the dearth of liquidity in the market. Furthermore, the crowdfunding industry has been stifled by regulation. While donation-based and reward-based crowdfunding are permitted by extant regulation, equity crowdfunding is considered illegal.[7] This has curtailed the growth of the retail market.
FinTechs fall under Non-Banking Financial Institutions (NBFIs), which are perceived as weaker institutions compared to Banks. This causes a dip in the market’s confidence in FinTechs. Other problems causing low market confidence are:
As a result of lack of awareness, a typical retail customer would rather have his/her money in a bank account or invested in land/property than the capital market. To achieve better participation, capital market operators and FinTechs must collaborate to educate the public about their service offerings.
The industry is not dynamic and innovative in providing solutions for retail investors. Government has to offer incentives to encourage investment in FinTech innovation. Regulators must adopt a more innovative approach and the operators need to deploy more solutions to engage and encourage broad based participation. In addition, more products and services must be designed around the investment needs of the public, and not just High Net-Worth Individuals (“HNIs”).
Infrastructures such as power, high-speed broadband, cloud infrastructure, and IOT infrastructure are lacking; and where available are not optimal. The cost of setting up infrastructure required to power FinTech solutions is usually passed to the final consumer. The right digital infrastructure will create safer, efficient, and more transparent platform for financial services, building confidence, and ensuring speedy services delivery and stability in the system.
There is a low level of participation of venture capital/growth funds in FinTech investments. The non-existence of numerous marketplace platforms where FinTech startups can demonstrate their innovative offerings to potential investors, and the absence of developed platforms for alternative funding markets providing capital formation for FinTech startups are challenges facing FinTech startups. In addition, the absence of a single source of guidance or regulation around funding for FinTechs through venture capitalists in Nigeria subjects the process to variation and uncertainty.
The report admits that while there have been attempts by the innovative hubs to offer support to startups, the effect has not been felt across the FinTech startups community. In addition, the quality of the incubation/accelerator entrepreneurial support system for FinTech in Nigeria is heavily reliant on foreign technical support and investment. The need for these support systems is underpinned by the fact that many local startup founders have a technical background in technology and are not familiar with industry practices in capital markets and banking.
Recommendations
After identifying the foregoing problems, the Committee recommended as follows:
1. Deepening Market Penetrations
In order to improve the penetration of investment products, the Committee
recommends that:
A. Collaboration
i. SEC should collaborate with the CBN to streamline customer onboarding and simplify the process of new product registration.
ii. SEC should collaborate with Self-Regulatory Operators to provide access to information for FinTech oriented public/startups.
iii. SEC should collaborate with the National Pension Commission to ease tension between fund and pension managers, share knowledge with the Commission to effectively allocate available assets and revise regulations, such as the SEC Rules.
iv. SEC should collaborate with the National Insurance Commission (NAICOM) to promote the adoption of FinTech as distribution channels for the promotion and sales of insurance products and educate consumers on how insurance works.
v. SEC should collaborate with educational institutions to develop industry relevant curriculum, create cross-country financial literacy programs and hold seminars and conferences on financial literacy in capital market.
vi. The government should collaborate with universities and other tertiary institutions to deepen training and research in software skills and engineering, provide grants for training prospective software developers to high globally recognised standards and implement fiscal policies to provide tax breaks for institutions and individuals investing in startups and FinTechs.
B. Fostering an Innovative Environment
i. SEC should intensify its efforts to raise awareness on the benefits of investing in the Nigerian capital market.
ii. SEC should encourage the development and introduction of FinTech-led innovation in the market.
iii. SEC can collaborate with Nollywood or leverage YouTube and Facebook to develop and disseminate short videos on financial literacy, to educate the public.
iv. SEC should create a sandbox and collection of Application Programming Interface (API) services that can be made available to FinTech firms to create innovative solutions.
C. Invest in RegTech and Process Improvement Technologies
RegTech platforms will strengthen inspection and investigation processes and ensure transparent enforcement and prosecution of digitized rules/codes.
2. Consumer Protection, Security and Data Privacy
A. The Committee recommends that SEC should collaborate with regulators and government agencies to develop FinTech oriented privacy and security policies. Global privacy regulations, such as the Convention No108,[8] the OECD Guidelines on the Protection of Privacy and Transborder Flows of Personal Data,[9] and the EU General Data Protection Regulation,[10] should be reviewed and adapted to Nigerian startups. Competition rules should also be enforced to prevent formation of data provider monopolies.
B. FinTechs should comply with industry standards in data exploitation, data minimisation, information security, responding to cyber incidents and periodically assess their security posture for systemic vulnerabilities.
3. FinTech Friendly Regulation/Policies and Compliance
To address the regulatory challenges that FinTechs encounter, the following were recommended:
A. SEC to drive a harmonized regulatory agenda by creating a centralised committee of all regulators (charged with the responsibility of formulating and ratifying policies and regulations for FinTechs) and allow different FinTech businesses to be regulated by different bodies within the committee. Equity financing/crowdfunding are to be regulated by the SEC, while payments and lending are to be regulated by the CBN. In addition, SEC and other regulators in the industry should leverage on the regulatory sandbox to be made available to FinTechs by the Nigerian Inter-Bank Settlement Scheme instead of building individual ones. The Commission should also work with other government agencies to provide incentives to startups.
Due Date: Q4, 2020
B. Cryptocurrencies, Virtual Financial Assets and Initial Coin Offerings (ICOs)
i. SEC should decide on the preferred classification of cryptocurrencies; preferably as commodities or securities but NOT as currency.
ii. SEC should be responsible for regulating Virtual Financial Assets Exchanges.
iii. SEC should regulate equity-based crowdfunding while the CBN should regulate interest-based crowdfunding.
iv. SEC should issue guidelines and standards for white papers and ICOs.
v. SEC should have clear taxonomies of tokens based on their nature, characteristics, and economic realities as their determining factors.
Due Date: Q1, 2020
C. Accelerating Investments in FinTechs
i. SEC needs to establish a clear FinTech vision and agenda.
ii. SEC should consider creating “Speed Funds” where HNIs can invest in FinTechs through the capital markets.
iii. SEC should shorten the timeline for registration of FinTech companies.
iv. SEC, Self-Regulatory Organisations and Exchanges should ensure that listing requirements are FinTech-friendly.
Due Date: Q2, 2021.
D. Directory Services
i. SEC should create a RegTech platform as a one-stop shop to manage registration, licensing and approval of FinTechs, and a directory service where useful information about FinTechs in Nigeria can be accessed.
ii. SEC should organise hackathons to develop software solutions for automation of SEC’s regulatory processes.
iii. SEC should create a FinTech Office to manage investor relationships, engage and provide regulatory clarifications to new entrants, facilitate regulator-innovator-market-engagements, coordinate the communication and dissemination of relevant industry information, and provide support and advisory services to the industry.
Due Date: Q2, 2021.
E. Capacity Building
i. SEC should invest in capacity building for its employees charged with regulation.
ii. SEC should look to publish a report on FinTech in the Nigerian capital market, on an annual basis.
Due Date: Q1, 2021.
F. Engagement with FinTechs
i. SEC and other regulators should cooperate more with FinTechs through forums and engagement sessions.
ii. SEC should create an innovation Hub within the Commission.
Due Date: Bi-annually, Quarterly.
Commentary
With the buzz in the Nigerian FinTech space and the growing interest of entrepreneurs and foreign investors in FinTech companies that solve problems in the financial industry, the establishment of a Roadmap Committee and a blueprint for the development of FinTech companies in Nigeria is a step in the right direction. It is our hope that this Report will provide clarity to investors and entrepreneurs alike on the policy plan of the SEC for the integration of FinTech companies into its operations. The Committee provided a timeline for the implementation of its recommendations between Q4 2019 and Q4 2021 and expressed its availability to assist the Commission with the process of implementation.
_________________________________________________________________
For further information on this article and area of law, please contact
Olayanju Phillips at: S. P.A. Ajibade & Co., Lagos by
telephone (+234 1 472 9890), fax (+234 1 4605092)
mobile (+234.814.468.3333) or email
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