Mar 26, 2020

Highlights of the Report on the Future of FinTech in Nigeria – Olayanju Phillips



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.[2]


The terms of reference of the Committee were as follows:

  • Develop a FinTech roadmap for the Nigerian Capital Market;
  • Inform the SEC on approaches to innovation within the Financial Services sector;
  • Promote access to capital in the Financial Services sector;
  • Enhance financial inclusion in our economy;
  • Foster greater transparency within the Financial Services sector;
  • Enable more efficient compliance in regulator regime;
  • Serve as a think tank which will provide guidance on independent research for examining the role and value of FinTech in the financial ecosystem; and
  • Seek efficient and responsible policy regulatory regimes that balance financial innovation and consumer protection.

The Committee submitted its report titled “The Future of FinTech in Nigeria” (“the Report”)[3] 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:


1.      Regulation

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]


2.                  Access to Data

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.[5]


3.                  Cybersecurity

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.[6]


4.                  Capital Market Liquidity

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.


5.                  Lack of Market Confidence

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:

  • Low Investments participation;
  • Poor trading operations process/infrastructure;
  • Poor communication of value proposition; and
  • Dearth of innovative solutions to bring FinTechs into the mainstream market and encourage retail and institutional participation in their funding.

6.                  Institutional Knowledge Gap

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.


7.                  Lack of Innovation

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”).


8.                  Weak Digital Infrastructure

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.


9.                  Underdeveloped Venture Capital/Growth Funding Structure

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.


10.             Lack of Incubator-accelerator Entrepreneurial Support System

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





[1]     Olayanju Phillips, Associate, Corporate Finance & Capital Markets department, SPA Ajibade & Co., Lagos, Nigeria.


[2]     Held on the 14th of November 2018 at the Federal Palace, Hotel, Victoria Island, Lagos. See ‘Notification for Third CMC Meeting in 2018’ (SEC Nigeria, 19 October 2018) (accessed 22 January 2020).


[3]     Fintech Roadmap Committee of the Nigerian Capital Market, ‘The Future of Fintech in Nigeria’, April 2019  (accessed 22 January 2020).


[4]     The registration process involves an application for approval from the Commission by filling the FinTech assessment form http://sec.gov.ng/regulatory-sandbox-assessment/. The SEC engages the FinTech company and registers it if it meets its requirements. The length of time it takes to receive SEC’s approval to offer a FinTech product depends on the nature of product and whether the SEC has existing Rules or Guidelines to regulate them.


[5]     Pursuant to Para 2.1 of the Nigeria Data Protection Regulation 2019, data may no longer be collected, processed or shared with third parties, except with the lawful consent of the data subject. Furthermore, by the provisions of Para 2.2, the consent of the data subject must obtained for each purpose the data will be processed, unless the processing is necessary for compliance with a legal provision, performance of a contract to which the data subject is a party, to protect the interests of the data subject or of another person, or in the public’s interest.


[6]     In a bid to curb these threats, the Cybercrimes Act (Prohibition, Prevention, etc) Act, 2015 criminalizes unlawful access to a computer with intent to obtain confidential information, unlawful interception of communications, unauthorised modification of computer data, computer related forgery, identity theft and impersonation (See sections 6,7,8,11 and 13 of the Cybercrime Act, 2015). Significantly, there are no requirements for reporting cyberbreaches and intelligence sharing across organisations to build cyber resilience in the Act. Proactive safeguards to be put in place by data controllers and data processors are also conspicuously absent.


[7]     Section 22(5) of the Companies and Allied Matters Act CAP C20 LFN 2004 prohibits private limited companies (which most FinTech companies are registered as) from inviting the public to subscribe for any shares or debentures of the company or deposit money to it. Section 67 of the Investments and Securities Act also prohibits all persons from making invitations to the public to acquire or dispose of any securities of a corporate entity or to deposit money with any corporate entity for a fixed period or payable at call, unless the body corporate is a public company. Furthermore, a public company may only offer its shares to the public through a registered Exchange, subject to certain restrictions placed by the Commission, including approval of the Commission and registration of the securities.


[8]     Council of Europe, Convention for the Protection of Individuals with regard to the Automatic Processing of Individual Data, 28 January 1981, ETS 108, available at:  (accessed 28 January 2020).


[9]     Organisation for Economic Cooperation and Development (OECD), Guidelines Governing the Protection of Privacy and Transborder Flow of Personal Data, 23 September 1980, available at:  (accessed 28 January 2020).


[10]    Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) (accessed 28 January 2020).



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