Amid upsurge in financial technologies (fintechs) start-ups and patronage of digital assets and digital investment platforms, Nigeria is concluding arrangements to roll out its first regulatory framework for digital investment advisory services providers.
The forthcoming regulatory for digital investment advisory services providers, otherwise known as “Robo” because of the deployment of robotic interface, is the first phase of larger regulatory frameworks that include digital assets, offerings and intercontinental, borderless trading on emerging securities, according to sources.
A draft of the proposed regulatory framework for digital advisory services obtained by The Nation describes “Robo” or digital advisory services as “the provision of advice on investment products using automated, algorithm-based tools which are client-facing, with little or no human adviser interaction in the advisory process”.
Digital advisory services are categorised into two under the framework- fully automated and semi-automated. A fully-automated “Robo” advisory services provider requires no human adviser intervention in the entire advisory process while a semi-automated service allows minimal human intervention or interaction.
When it comes into effect, the new regulatory framework will become the basic regulatory document fo the Nigeria and shall be applicable to all institutional and individual capital market operators and persons offering or seeking to offer digital advisory services in Nigeria.
The framework brings digital or “Robo”advisors under the regulatory purview of Securities and Exchange Commission (SEC), Nigeria’s apex capital market regulator.
According to the proposed framework, digital investment advisers are required to put in place “adequate policies, procedures and controls to mitigate against money laundering and terrorism financing risks and comply with the Commission’s regulations on Anti-Money Laundering and Combating the Financing of Terrorism Act, 2013”.
The “Robo” advisers are also required to take steps to address specific risks associated with Non-Face-To- Face (NFTF) business relations with a client and employ additional checks to mitigate the risk of impersonation when on-boarding clients through a NFTF means.
“Robo” Advisers are also expected to provide sufficient information to their clients to enable them make informed investment decisions. with such disclosures presented in plain English and in clear simple language.
In line with the above, a digital investment adviser shall disclose to his client in writing the assumptions, limitations and risks of the algorithms, circumstances under which the Robo Advisers may override the algorithms or temporarily halt the robo advisory service; and any material adjustments to the algorithms.
To avoid conflict of interest, “Robo” advisers are required to comply with the disclosure requirements on conflicts of interest set out in the Code of Conduct for Employees of Capital Market Operators as well as disclose in writing to their clients, any actual or potential conflict of interest arising from any connection to or association with any product provider, including any material information or facts that may compromise their objectivity or independence.
“In the context of their business model, “Robo” advisers shall disclose situations where their algorithms are designed to direct clients to invest in products managed by their affiliates,” the draft stated.
With the growing investment of Nigerians in overseas-listed Investment products, the draft framework requires “Robo” advisers to provide a risk warning statement to their clients at the point of account opening and when advising them on overseas-listed investment products. Also, when advising on overseas-listed investment products, “Robo” advisers shall assess the merits of the products, as well as the client’s investment objectives, financial situation and particular needs as well as ensuring that all these are not in violation of any applicable laws and regulations.
To safeguard the client-facing tools which are primarily algorithm-driven, a “Robo” or digital investment adviser shall put in place adequate governance and supervisory arrangements to effectively mitigate against fault or bias in the algorithms.
The board and senior management of the “Robo” adviser shall be responsible for maintaining effective oversight and governance of the client- facing tool and, ensure that there are sufficient resources to monitor and supervise the performance of algorithms.
The “Robo” adviser should be adequately staffed with persons who have the competency and expertise to develop and review the methodology of the algorithms. Adequate training should also be provided to all staff members who use the client-facing tool.
“The board and senior management of the “Robo” adviser shall also put in place systems and processes to ensure a sound risk management culture and environment in its firm, as well as compliance with the relevant rules and regulations,” the draft stated.
The responsibilities of the directors of the digital investment advisory firms or platforms include approving the design and methodology development of the client-facing tool and ensuring its proper maintenance, approving the policies and procedures that apply to the systems and processes of the client-facing tool, maintaining oversight over the management of the client-facing tool, such as designating appropriate personnel to approve changes to the algorithms, having security arrangements to identify and prevent unauthorised access to the algorithms, ensuring that the requirements set out in the SEC’s guidelines on technology risk management are adhered to and maintaining proper documentation on the design and development of the algorithms.
In ensuring accountability and utmost responsibility, the proposed rules state that while the board and senior management may delegate the daily oversight and governance of the client-facing tools to other personnel, the board and senior management remain ultimately responsible and accountable for the proper development, monitoring and testing of the client-facing tools.
Also, in developing the client-facing tools, “Robo” advisers shall ensure that the methodology of the algorithms behind the client-facing tool is sufficiently robust, that the tool collects all necessary information and sufficiently analyses same to make a suitable recommendation, including have proper mechanisms to identify and resolve contradictory or inconsistent responses from clients and have controls in place to identify and eliminate clients who are unsuitable for investing.
Additionally, “Robo” advisers shall perform sufficient testing, prior to the launch of the tool and when changes are made to the tool, to detect any error or bias in the algorithms and to consistently and reliably ensure that the algorithms correctly classify clients according to their risk profiles based on inputs provided by them.
In particular, the “Robo” adviser shall conduct back-testing using hypothetical inputs to ensure that the risk profiles generated by the algorithms are in line with its risk profiling methodology. The testing shall ensure that the algorithm scores and assigns risk profiles to clients correctly and consistently; and that the algorithms produce the intended asset allocation and investment recommendation according to the “Robo” adviser’s risk profiling methodology.
Besides, the “Robo” advisers shall have policies, procedures and controls in place to monitor and test the algorithms on a regular basis to ensure that they are performing as intended. At the minimum, such processes should include access controls to manage changes to the algorithms whenever necessary, controls to detect any error or bias in the algorithms, controls to suspend the provision of advice if an error or bias within the algorithms is detected and compliance checks on the quality of advice provided by the client-facing tool. Such checks shall be conducted regularly and when there are changes to the algorithms, including post-transaction sample testing, and shall be reviewed by an independent and qualified human adviser to ensure compliance with the requirements of extant laws and regulations.
According to the proposed framework, the digital investment advisers shall implement internal policies and procedures to address technology risks while also meeting the requirements set out in SEC’s guidelines on technology risk management (TRM) and also refer to the TRM guidelines for industry best practice which they are expected to adopt.
Digital advisers shall perform a gap analysis against the requirements set out in the TRM guidelines to ensure that all gaps are adequately mitigated prior to the launch of the client-facing tools and also when changes are made to these tools.
The digital investment advisers are also required to have a reasonable basis for recommending any investment product to a person who may reasonably be expected to rely on the recommendation while also ensuring that a recommendation takes into account a client’s investment objectives, financial situation and particular needs.
In assessing the suitability of investment advice, a digital adviser shall take reasonable steps to collect and document information on the financial objectives of the client, the risk tolerance of the client, the employment status of the client, the financial situation of the client, including assets, liabilities, cash flow and income, the source and amount of the client’s regular income, the financial commitments of the client, the current investment portfolio of the client, including any life insurance policy, whether the amount to be invested is a substantial portion of the client’s assets; and for any recommendation made in respect of life policies, the number of dependants of the client and the extent and duration of the financial support required for each of the dependants.
However, a fully automated “Robo” adviser may exempt the collection of full information on a client’s financial circumstances if the advice is fully-automated, with no human adviser intervention in the advisory process or where human interactions are limited to providing technical assistance such as, assisting clients on IT-related issues or clarifying with clients on their responses when inconsistencies are noted as well as where there are in-built “knock-out” or threshold questions to effectively identify and eliminate unsuitable clients and there are controls in place to identify and follow up on inconsistent responses provided by clients. Such exemption also requires provision of a risk disclosure statement to clients to alert them that the recommendation does not take into consideration their financial circumstances, at the point when the recommendations are provided to them; and when the advice is limited to instruments within the regulation of SEC.
Notwithstanding, all “Robo” advisers shall still take reasonable steps to collect information on the client’s financial objectives and risk tolerance to satisfy themselves that the investment recommendation is suitable and to assess if a client possesses the relevant knowledge and experience to invest in complex instruments through the Customer Knowledge Assessment (CKA) or Customer Account Review (CAR). This applies, regardless of whether the client is self-directed or not.
According to SEC, the proposed new regulatory framework is expected to provide “guidance on the regulatory requirements and expectations in relation to the provision of automated advisory services”.
Lack of Digital Infrastructure and Mobile Services Affecting Remittance Risks Leaving Millions of Rural Families in Poverty – IFAD
Despite a massive increase in migrants sending money home via digital transfers due to the COVID-19 pandemic, millions of their rural family members struggle to access mobile banking services which could help lift them out of poverty.
The President of the UN’s International Fund for Agricultural Development (IFAD) has called for urgent investments in digital infrastructure and mobile services in developing countries to ensure rural families are not left behind.
“Migrants have shown their continued commitment to their families and communities during the pandemic with more remittances transfers made digitally than ever before,” said Gilbert F. Houngbo, President of IFAD, speaking on the International Day of Family Remittances. “Unfortunately, families in rural and remote areas – where remittances are a true lifeline – the battle to access cash outlets or even more convenient alternatives such as mobile money accounts. Governments and the private sector need to urgently invest in rural digital infrastructure to address this.”
Mobile remittances increased by 65 percent last year, rising to US$12.7 billion. This change was driven by a switch from cash due to lockdowns that limited informal channels and social distancing rules for senders and recipients alike. In spite of the global economic recession due to the pandemic, migrants continued to send money home to their families, with remittances in 2020 reaching $540 billion – a drop of only 1.6 percent compared to the previous year.
However, in many countries, people living in remote rural areas have sparse local access to banking services or limited mobile connectivity. In addition, there is limited availability of agents offering mobile money services such as payouts in cash. Often mobile money service providers are only located in urban centers. This means millions of poor, rural people have to travel long distances to towns or cities, often at significant cost, to receive the cash sent digitally by their migrant family members.
Digital transfers are cheaper than traditional cash transfers, and mobile banking services also provide the opportunity for migrants and their families in their countries of origin to access useful and affordable financial products to better manage their finances, including savings, loans and insurance.
Across the globe, 200 million migrants regularly send money to their 800 million relatives. This plays a crucial role in their lives and livelihoods. Almost half of these families live in rural areas of developing countries, where poverty and hunger are highest. Families use the funds sent by migrant workers to cover basic household needs such as food, housing, school and medical bills, as well as to start small businesses. These resources can often transform both families and local communities.
“While the pandemic accelerated the adoption of digital transfers and mobile money accounts, it also highlighted pervasive gender inequality,” said Pedro de Vasconcelos, the head of IFAD’s Financing Facility for Remittances. “Research shows that women are 33 percent less likely than men to have a mobile money account. We must focus on closing the gap by addressing the barriers that prevent women from accessing and using mobile financial services.”
TeamApt Transactions Hit N1.4T In May
Nigeria’s one of Nigeria’s leading fintech companies, Teamapt said it transacted N1.4 trillion ($3.5billion) value in 68 million transactions volume in May 2021 on its agency banking platform.
The data sourced from the monthly report of Shared Agent Network Expansion Facilities (SANEF), an initiative of the Central Bank of Nigeria (CBN) to promote agency banking and mobile money in the country, shows that Teamapt controls 74 percent of the total agency banking operations within the period.
The company which is currently leading Nigeria’s agency banking industry provides financial services for the underserved mass market through Moniepoint – its financial access product, and Monnify – its payment gateway infrastructure.
At a media briefing on Thursday in Lagos, officials of Teamapt revealing more of its transaction figures and financial performance for the past months said in less than two years, the company has grown rapidly to operate the largest agency banking platform with a network of over 100,000 agents.
In March 2021, it hit a milestone of transactions worth over N1trillion ($2.4bn) for the first time. In May, the value increased to N1.4 trillion ($3.5bn) with 68 million transactions in volume, and between April 2020 and April 2021, the total value of transactions processed has gone up to $16 billion.
Speaking on the company’s plans to transform financial services in Africa, CEO and founder of TeamApt, Mr. Tosin Eniolorunda said “To achieve our mission of providing financial happiness for all, we started out by building working infrastructure and distributing this in every of Nigeria’s 36 states.
“So far, Moniepoint has served over 25 percent of the 48 million banked Nigerians, previously underserved by the financial system. This is a great feat but we still have a lot of work to do. Many Nigerians are still underserved, and with this pain not exclusive to Nigeria but shared among Africans, we intend to scale into more regions of the continent.
“We remain focused on innovating, and we expect that in the future, through Moniepoint, we will reach more people across Africa and build their trust in the financial system and processes. We look forward to empowering our agents with the facilities to offer other financial services directly to customers, beyond deposits and withdrawals,’’ Eniolorunda added.
TeamApt reiterated its commitment to transform financial services in Africa, the company was founded in 2015 and started out by building infrastructure for tier-one financial institutions.
SEC Plans to Launch Regulatory Incubation Programme For Fintechs
The Securities and Exchange Commission (SEC) has announced plans to launch a regulatory incubation (RI) programme for fintech operating or seeking to operate in the Nigerian capital market.
According to a circular published on the commission’s website on Wednesday, June 16, it says that the initiative will be launched in the third quarter of 2021 and will operate by admitting identified fintech business models and processes in cohorts for a one-year period.
The RI program comprises two phases of participation – an initial assessment phase and the regulatory incubation phase.
The SEC said that the categories to be admitted into each cohort will be determined based on submissions received through the fintech assessment form and communicated ahead of each take-off date.
The circular read: “Review of completed Fintech Assessment Forms will continue on an ongoing basis. FinTechs who consider that there is no specific regulation governing their business models or who require clarity on the appropriate regulatory regime for seeking the authorization of the Commission, are encouraged to complete the Fintech Assessment Form.”
The commission maintained that it designed the RI program in order to address the needs of new business models and processes that require regulatory authorization to continue carrying out full or ancillary technology-driven capital market activities.
It will serve as an interim measure to aid the evolution of effective regulation which accommodates the innovation by fintech without compromising market integrity and within limits that ensure investor protection.
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