Fintech
The Trinidad and Tobago Securities and Exchange Commission (“Commission”) has a responsibility and legislative mandate to understand, monitor, and where appropriate encourage innovative developments as it relates to the securities industry.
The TTSEC’s internal approach to Fintech is founded upon four (4) strategic pillars which encompass the main considerations that will enable the Commission to achieve its legislative mandate as it applies to Fintech products and services in the securities industry. The four pillars and their goals are described in figure 1 below.
The 4 pillars provide the foundation on which the Commission will build its framework for regulating the Fintechs in the securities industry while creating a sustainable environment for current and future registrants to embrace technology and innovation and successfully change the way financial services are delivered for the benefit of the economy.
Figure 1
Stakeholder Collaboration
Collaboration with other regulators and the private sector to implement regulations to facilitate development of the Fintech Industry.
Knowledge
Cultivate talent pools and stimulate research
Regulation and Supervision
Infrastructural enhancement and legislative amendment to support innovation and regulatory efficiency.
Security
Establish an environment that is resilient to cybersecurity threats.
Stakeholder Collaboration
The Commission conducted an analysis of stakeholders based on interest and relevance. This assisted in determining a number of primary and secondary stakeholders. The Commission’s collaboration with stakeholders is of paramount importance to the implementation and success of the Fintechs in the securities industry. It is vital that financial institutions within the securities industry become innovative to remain relevant and expand to new opportunities.
Knowledge
A key priority in cultivating a technologically innovative securities industry is attracting, developing and retaining talent in the areas of finance and technology. The Commission understands that both the regulator and regulated compete extensively with each other to secure talent from a seemingly limited pool of candidates. The Commission wishes to cultivate talent pools and stimulate research on the areas of Fintech along with other support services, such as AML/CFT, which forms an essential part of regulatory compliance.
Regulation and Supervision
The Commission aims to adopt regulatory and supervisory initiatives to support innovation and improve regulatory efficiency. These initiatives will be supported by various regulatory tools and legislation. The category of regulation and supervision is composed of the two (2) major categories of infrastructure and legislation.
Security
The Commission aims to establish an environment that is resilient to cybersecurity threats. In order to mitigate the possibilities of unintended consequences and threats emerging from the nature of the technologies employed, it is paramount that Fintech providers implement robust and comprehensive cybersecurity risk-management systems including risk-mitigation techniques and recovery plans in case of cyber incidents.
The vision for the Commission’s Fintech policy is grounded on the three main purposes for which the Commission was established: 1. Investor protection; 2. Market growth; and 3. Reducing systemic risk.
Vision
To regulate and supervise a transparent and stable environment which encourages technological innovation in the securities industry in Trinidad and Tobago for the benefit and protection of investors and the financial sector.
Mission
To create a secure, transparent and stable environment for the development of Fintech products and services in the securities industry in Trinidad and Tobago through infrastructural enhancement, the development of adaptable legislation, collaboration and knowledge sharing.
Risks of Fintech to the Securities Industry
IOSCO identified some of the major fintech products impacting the securities industry internationally and recorded the risks inherent to each of them. These risks range from disclosure risks to cyber risk and are further identified in figure 2 below.
The specific risks identified in figure 2 not only provide risks to the investor but may affect the financial system as a whole.
IOSCO Research Report on Financial Technologies (Fintech) February 2017
Alternative Financing Platforms
- Risk of conducting general solicitation/ unlicensed activities.
- Disclosure risks
- Cross-border risk
- Risk of collapse, fraud or malpractice by the platform
- Risk of fraud by the users of the platform
- Default risk of the borrower.
- Liquidity risk/ lack of secondary market liquidity for the loans
- Risk of bankruptcy of the issuer
- Liquidity risk/ lack of secondary market liquidity for the equity investments
- risk to the operation of fair and efficient markets
Retail Trading and Investment Platforms and Automated Advice Tools
- Risk of platform being operated by unregistered entities
- Risk resulting from conflicts of interest and insufficient cost and fee transparency.
- Risk of “execution-only” platforms crossing into offering “automated advice”
- Risk of failing to “know-the-client” from an anti-money laundering and fraud control standpoint
- Risk of failing to “know-the-client” from a suitability standpoint
- Risk that clients do not understand the services provided or products offered
- Risk of suboptimal or even unsuitable investment choices due to behavioural biases.
- Risks of errors in algorithms.
- Risks of overly complex algorithms
- Risks of overly simplistic algorithms
- Risk of static client information.
Institutional Trading Platforms
- Sustainability is a challenge
- information leakage;
- potential of an order not being filled or filled for an undesirable price
- uncertain performance during stressed market conditions
- potential for wide bid/ask spreads
- Gaps in liquidity
- lack of product diversity
Distributed Ledger Technologies (DLT)
- Technological Challenges: Scalability; interoperability; cyber risk
- Difficulty reversing or correcting historical errors (no recourse mechanism for errors)
- high maintenance network which can affect sustainability
- smart contracts introduce coding errors not accurately reflect human intent for the contract
- reduction in the efficiency. need to operate a separate cash ledger for transaction settlement.
- Too transparent, such that traditionally confidential information is in plain sight
- Legal challenges: tokens as a representation of ownership and legal finality of smart contracts
- AML and KYC concerns in permission-less DLTs.
Risks associated with Cryptocurrencies and Virtual Assets
Several securities regulators worldwide have developed concerns over the issuance of cryptocurrencies and other virtual assets. In Trinidad and Tobago persons and entities have purported to issue coins or other virtual assets for purchase with the promise that the value of the virtual asset will increase in time thereby affording early “investors” the ability to sell for a profit at some future date. Such offerings have caused the Commission, the Central Bank of Trinidad and Tobago (CBTT), the Financial Intelligence Unit of Trinidad and Tobago (FIUTT) and the Ministry of Finance to issue cautionary statements, both jointly and severally, over the last two (2) years. These cautionary statements advised of the risks associated with investing in such products which include the heightened potential for fraud, cross border distribution risk, information asymmetry and liquidity risks. These key risks have been cited by many international securities regulators.
Money Laundering (ML) and Terrorist Financing (TF) Risks
In its public statement dated 19th October 2018, the FATF identified that Virtual Assets and related financial services create new opportunities for criminals and terrorists to launder their proceeds or finance their illicit activities. Digital currency has a high risk of money laundering and terrorist funding due to its high degree of anonymity and ease for cross-border transactions which makes the monitoring of transactions more complex for financial institutions and public authorities. Fintechs may also fall outside the scope of financial sector regulation and therefore would be subject to less stringent Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) rules than registered and licensed financial institutions.
As a means of mitigating the ML/TF risks posed by Fintechs, FATF has called for the registration of VASPs. In October 2015, Recommendation 15 was amended to clarify how the FATF standards apply to activities or operations involving virtual assets. Subsequently the draft interpretive note to Recommendation 15 was finalised and will be formally adopted as part of the FATF Standards in June 2019. This interpretive note sets out what is required of countries in the implementation of Recommendation 15 and relays the requirement for countries to assess their risk of ML and TF emerging from Virtual Assets and take a risk-based approach to mitigating those risks. Interpretive note to Recommendation 15 also requires countries to license or register all VASPs and to have a range of effective, proportionate and dissuasive sanctions available to deal with VASPs that fail to comply with AML/CFT requirements for products and services.