Understanding Financial Regulation
Understanding Financial Regulation and How it Works
Introduction to Anti-Money Laundering and Combating Financing of Terrorism Regulation
When mobile operators decide to offer MMT services, they are first confronted with Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) regulation. It applies mostly in situations where cash is paid in or out as part of a MMT service. Whilst complying with AML/CFT regulation is standard practice for banks, these rules are not something mobile operators are traditionally familiar with.
Complying with these rules can be difficult for the mobile operator for following reasons:
- In most countries non-financial institutions are not allowed to undertake customer due diligence and 'Know Your Customer' (KYC) checks on behalf of banks because of the country-specific regulatory framework for agencies.
- Often the customer has to come to the store in person and their address has to be cross-checked with an official document. This face-to-face registration can have a negative impact on the speed of enrolment and therefore the cost and customer experience. A 'mobile experience' may not be possible.
- Complying with AML/CFT is costly and may not be proportionate to the given risks.
Introduction to Prudential Regulation
Prudential regulation ensures that regulated entities are financially sound and promotes their prudent behaviour. The key aim of prudential regulation is protecting the interests of consumers and the quality of an institution's systems for identifying, measuring and managing the various risks in its business.
Prudential regulation can apply in various measures depending on the risks. From a mobile operator perspective following thresholds of prudential rules depending on the risks involved seems useful:
- Payment regulation: low risk – light prudential rules
- E-money: medium risk – medium heavy prudential rules)
- Deposit taking (i.e. banking): high risk – heavy prudential rules
A risk-based approach by financial regulators with regard to regulation of MMT services is crucial for the take-up of MMT services. Financial regulators and mobile operators have to work closely together to understand the risks involved in a new generation of financial regulation for MMT services. This leads to the emergence of new regulatory concepts of e-money and payment regulation.
Introduction to Regulation on Outsourcing and Use of Agents
Regulation on the use of agents determines if entities other than banks are allowed to handle cash at both ends of the MMT, whether on behalf of banks or non-banks (i.e. remittance providers). In cases where regulation permits the outsourcing of the cash handling function, entities which already handle cash, such as retailers, may act as agents for financial institutions. Mobile operators are likely to be affected by the same rules governing the use of agents in situations where they want to handle cash at both ends of the remittance transaction. It is often easier for a mobile operator to become an agent for a remittance provider than for a bank.
For More Information
If you would like more information on these regulations, please download the GSMA document on Understanding Financial Regulation and How it Works (PDF 238KB). This document outlines some basic regulatory concepts in financial regulation including Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT), prudential regulation (deposits, payments, e-money) and outsourcing and use of agents.
Each major regulatory concept is explained in terms of background and purpose, the most important obligations, and how mobile operators are likely to be affected.
The document also covers regulatory issues, which may not come from the body of financial regulation, but which may also affect the mobile operator's offering of MMT services. These include rules around access to the national payment system, data privacy, foreign exchange controls and consumer protection.
