At the Ghana Fintech 23 Awards night, the organizers did something novel - organized a debate. It was a debate on the topic “balancing innovation and compliance in creating a digital economy”. The “innovation” team went up fiercely against the “compliance” (regulation) team and the audience voted massively in favour of the innovation team (largely expected because it was a night of industry innovators).

And beyond the awards night, this debate will continue among regulators and innovators with each pushing to advance their priorities. Nonetheless, no matter which side of the debate you support, the role of regulators in ensuring a stable, robust, and resilient financial sector cannot be overlooked.

Therefore, the purpose of this article is to highlight and assess the role of regulations and the regulator in leveraging the ends of innovation and compliance in promoting financial inclusion and the achievement of financial sector goals.

FINANCIAL SECTOR REGULATION IN GHANA

The mandate to regulate, supervise, and manage Ghana’s financial sector is traceable to the supreme law of the land - the Constitution. By the constitutional establishment of the Central Bank, the Bank of Ghana has been clothed with the primary responsibility for the management of the financial sector in Ghana.

Backed up by specialized Acts of Parliament, guidelines, and directives, the Central Bank continues to carry out its mandate creditably, particularly in regulating, supervising, and managing traditional commercial banks and new financial technology (fintech) entities.

Over the years, the protection of the public interest manifested by the protection of depositors’ funds and users of regulated financial services has been the preoccupation of the Bank. In the continued pursuit of this primary goal, the Bank continues to promote the adoption of compliance standards in accordance with local laws, global standards, and best practices.

Although this commitment to strict regulatory compliance has not resulted in a proven financial system without risks and exposures, it has historically been the bedrock of a seemingly stable financial system we have in Ghana.

Today, we have a financial system in Ghana because of regulations. The reverse would have been a chaotic financial system, run and controlled by private entities and individuals with the sole aim of exploiting the end-users. Even the most admired financial systems globally have only attained such heights due to “regulations” – the existence of laws on permissible financial services and products, clear reporting, and compliance demands, strong institutional approaches to supervision, regulation, and implementation of sanctions, open, transparent, and accountable financial service procedures among others.

Evidently in Ghana, the Central Bank has responded despite some challenges to changing demands of financial service regulations brought about due to the advances in technology, the design and deployment of new innovations.

The uptake in technological advances such as blockchain, artificial intelligence (AI), machine learning, etc has led to the development of disruptive financial products and services in areas of payments, savings and investments, credit and lending, remittances, etc.

In response to regulating the financial use cases of these new technologies, the Central Bank in the year 2020 established the Fintech and Innovation Office to drive the Bank’s cash-lite, electronic payments and digitization agenda. Today, the Fintech and Innovation Office in line with its mandate has rolled out a licensing regime for financial service innovations (with more than 50 companies so far licensed), launched and admitted the first cohort of new innovations without existing license categories into its regulatory sandbox program and recently held an e-cedi hackathon allowing the private sector to showcase use cases of the bank’s planned Central Bank Digital Currency (CBDC), e-cedi.

Remarkably, the further commitment by the Bank through policy speeches and statements by its governors of its willingness to consider where possible the regulation and adoption of new digital currency forms such as cryptocurrency is a testament of the Bank’s resolve to embrace innovations which advance the financial sector goals and serve the needs of consumers.

WHAT MUST BE THE APPROACH GOING FORWARD?

Despite the challenges of financial service regulation globally and locally, regulation per se has produced some significant results without which we may not be having a financial sector. The ability of the financial sector to transition to the now widely adopted digital financial services and products form could only be attributable to some entrenched benefits brought about by regulation over time.

Some of these benefits are:

1. Certainty: Consistent with the primary characteristic of law generally, regulations have provided some level of certainty about financial services. Through regulation, identifiable and verifiable institutions have been established with clearly defined service offerings. The widely accepted concepts of banking, banks as institutions, deposit-taking procedures, withdrawal, and fund transfer procedures, etc have all attained some level of certainty as a result of regulations.

The continuous certainty about financial outcomes will be imperative for the development of any financial system going forward.

2. Building of Trust: Trust has a significant role in building any financial relationship between service providers and end-users. The difficult task of building trust is usually accelerated by regulations where consumers prefer to deal with regulated and licensed financial service providers other than unregulated ones.

And as we head into a new era of financial service provision where physical infrastructures such as offices, branches, etc are being replaced with digital tools, the continuous regulation of financial services will offer some seal of approval and endear trust in the licensed and regulated services.

3. Consumer confidence: Closely connected to the weight of regulations on the building of trust in financial services is its effects on consumer confidence. The outcomes of regulations such as approved or licensed institutions, permissible products, and services, established compliant procedures, effective supervisory regimes, and consistent reviews of banking practices, procedures and guidelines among others increase consumer confidence in the financial sector.

The net effect of increased consumer confidence will be the acceleration of the adoption of new financial service offerings going forward. This couldn’t be the case without the regulation of financial services.

4. Consumer protection: Globally, regulators of financial sectors have always prioritized one objective – the protection of the end consumers, depositors, and users of regulated financial services. To this end, specialized regulations have been designed to ensure private sector stakeholders such as banks, and fintech companies embed and comply with consumer protection regimes against unjust enrichment, fraud, etc.

Where systematic failures from regulated financial services have resulted in the loss of depositors’ funds, regulations have been used to reform financial sectors, sanction defaulters, and save depositors’ funds.

These benefits notwithstanding, the regulatory process and approach must be enhanced with regular reviews in tandem with the rate of adoption of new innovations, strong supervisory regime, institutional capacity building on understanding emerging technologies, open and transparent guidelines on new initiatives, strong industry stakeholder collaborations and engagements, and clear policy guidelines on the non-use of innovation licenses among others.

While the use cases of technology are becoming a common phenomenon in financial service delivery, the use of regulations by regulators to create a balance between the promotion of the interest of end-consumers and the adoption of new innovations should not be compromised. Regulators must continue to perform the gatekeeper’s role, only permitting innovations which serve the real consumer needs and advance financial sector goals responsively and ethically.

CONCLUSION

Undeniably, we are witnessing many positive use cases of technological advancements across many industries and sectors and financial services are no exception. These innovations such as mobile money have helped accelerate financial inclusion at a much faster rate. Nonetheless, the inherent risks posed to the stability of the whole financial system must be checked with strict regulatory measures and compliance standards. The concerns of instability, risks, and opportunities to exploit an unregulated or liberal financial regulatory landscape reinforce the critical role of regulations and regulators in safeguarding all of us.