Consumer Risks In Fintech
New Manifestations of Consumer Risks and Emerging Regulatory Approaches
RISK MANAGEMENT
Content:
1. EXECUTIVE SUMMARY 1
2. INTRODUCTION 12
2.1 The Aims of This Paper 12
2.2 Key Fintech Products Covered in This Paper 14
2.3 How the Paper Is Structured 14
2.4 Areas Outside the Scope of This Paper 15
3. OVERVIEW AND IMPLEMENTATION CONSIDERATIONS 18
3.1 Cross-Cutting Risks and Regulatory Approaches 18
a) Gaps in regulatory perimeter 19
b) Fraud or other misconduct 21
c) Platform/technology unreliability or vulnerability 24
d) Business failure or insolvency 25
e) Consumers not provided with adequate information 26
f) Product is unsuitable for a consumer 33
g) Conflicts of interest and conflicted business models 36
h) Risks from algorithmic decision-making 38
i) Data privacy 39
3.2 Implementation Considerations 40
a) Importance of country context and striking an appropriate balance 40
b) Assessing the market, consumer experiences, and current regulatory framework 41
c) Determining the right regulatory approach 42
d) Effective supervision critical for impact 43
e) Complementary non-regulatory measures 43
4. DIGITAL MICROCREDIT 50
4.1 Introduction 50
a) Scope of chapter 50
b) Key characteristics of digital microcredit 50
c) Benefits and risks of digital microcredit 51
d) Emerging examples of regulatory approaches to address risks 51
e) Summary of risks and regulatory approaches discussed in this chapter 52
4.2 Consumers Not Provided with Adequate Information 52
a) Lack of adequate information 54
b) Poor format of disclosed information 55
c) Timing and flow of disclosed information 57
d) User interfaces 58
4.3 Marketing Practices via Remote Channels 59
a) Risks to consumers 59
b) Regulatory approaches 60
4.4 Unfair Lending 61
a) Risks to consumers 61
b) Regulatory approaches 62
4.5 Algorithmic Scoring 64
a) Risks to consumers 64
b) Regulatory approaches 65
4.6 Gaps in the Regulatory Perimeter 67
a) Risks to consumers 67
b) Regulatory approaches 68
5. PEER-TO-PEER LENDING 74
5.1 Introduction 74
a) What is meant by peer-to-peer lending? 74
b) Importance of effective financial consumer protection for peer-to-peer lending 75
c) Risks for consumers as lenders/investors or as borrowers 76
d) Summary of risks and regulatory approaches discussed in this chapter 76
5.2 Consumer Risks for Both Lenders/Investors and Borrowers 78
a) Gaps in regulatory perimeter 78
b) Fraud or other misconduct 81
c) Platform/technology unreliability or vulnerability 82
d) Business failure or insolvency 83
e) Inadequate credit assessments 85
f) Conflicts of interest between platform operators and lenders/investors or borrowers 86
5.3 Additional Consumer Risks for Lenders/Investors 88
a) Inadequate investment-related information 88
b) Harm due to lenders’/investors’ lack of sophistication or inexperience 94
c) Borrower fraud 97
5.4 Additional Consumer Risks for Borrowers 97
a) Inadequate loan-related information 97
b) Risks from digital provision of P2PL credit 98
6. INVESTMENT-BASED CROWDFUNDING 106
6.1 Introduction 106
a) What is investment-based crowdfunding? 106
b) Framing the risks 106
c) Summary of risks and regulatory approaches discussed in this chapter 107
6.2 Investor Inexperience and Higher-Risk Nature of Investee Companies 108
a) Risks to consumers 108
b) Regulatory approaches 109
6.3 Risks Related to the Nature of Securities Offered on Platforms 112
a) Risks to consumers 112
b) Regulatory approaches 113
6.4 Consumers Not Provided with Adequate Information 115
a) Risks to consumers 115
b) Regulatory approaches 116Contents v
6.5 Platform Operator Misconduct or Failure 119
a) Risks to consumers 119
b) Regulatory approaches 119
6.6 Issuer Fraud 122
a) Risks to consumers 122
b) Regulatory approaches 122
7. E-MONEY 128
7.1 Introduction 128
a) The significance of e-money in a consumer and inclusion context 128
b) Relevance of FCP to address e-money consumer risks 129
c) Key definitions 129
d) Risks and approaches 129
e) Summary of risks and regulatory approaches discussed in this chapter 129
7.2 Gaps in the Regulatory Perimeter 131
a) Risks to consumers 131
b) Regulatory approaches 132
7.3 Fraud or Other Misconduct 132
a) Risks to consumers 132
b) Regulatory approaches 133
7.4 E-Money Platform/Technology Vulnerability or Unreliability 136
a) Risks to consumers 136
b) Regulatory approaches 136
7.5 Mistaken Transactions 137
a) Risks to consumers 137
b) Regulatory approaches 137
7.6 Provider Insolvency or Illiquidity 138
a) Risks to consumers 138
b) Regulatory approaches 138
7.7 E-Money not covered by deposit insurance schemes 139
a) Risks to consumers 139
b) Regulatory approaches 140
7.8 E-Money Not Redeemable for Face Value 140
a) Risks to consumers 140
b) Regulatory approaches 140
7.9 Consumers Not Provided with Adequate Information 140
a) Key product information not disclosed upfront 140
b) Inadequate ongoing information 142
c) Inability to retain information 143
d) Disclosure format risks in a digital context 143
e) Misleading marketing 143
7.10 Unsuitable E-Money Products 144
a) Risks to consumers 144
b) Regulatory approaches 144
REFERENCES 149
Legislation, Binding Rules, and Guidance 149
Other Sources 151
