Southeast Asia’s fintech industry will have to maintain a delicate balance between promoting innovation and implementing strong regulatory frameworks. As this industry evolves, regulators across the region should work together to take proactive measures and collaborate to protect consumers and encourage fair and responsible financial practices.
As digitalisation continues to grow in Southeast Asia, regulators have to launch suitable legal and regulatory frameworks. However, they will also face several key obstacles in achieving a bal-ance between innovation and regulation that safeguards consumers.
“From a regulator’s perspective, the challenge lies in information asymmetry given the many complex attributes of these novel business models, and financial products that blur the boundaries between traditional and innovative ways of doing business whether it involves banking, investments, lending, payments, currency or other fintech,” says Kristine T. Torres, junior partner at Gorriceta Africa Cauton & Saavedra in the Philippines.
Torres notes that regulators are faced with the difficult task of identifying and predicting the various new and intricate risks presented by digitalisation. They must also quickly learn how to regulate these risks effectively. Although regulators strive to align their policies and regulations with the best international standards, they cannot simply adopt them without taking into account the differences in implementation when applied to various types of innovations or countries.
As fintech innovations often outpace the development of regulatory frameworks, regulators must stay updated on emerging technologies and business models to effectively address potential risks and consumer protection issues, according to Azmul Haque, founder and managing director at Singapore’s Collyer Law.
With many fintech companies operating across multiple Southeast Asian countries, regulators face a difficult task of coordinating and harmonising regulations to ensure consistency and effective oversight.
Finding balance between innovation and compliance can be challenging, according to Haque. Too much regulation can impede fintech progress, which may prevent consumers from enjoying the full benefits of these advancements. It is crucial to strike the right balance that fosters innovation while also ensuring compliance with consumer protection standards.
“Addressing these challenges requires a dynamic and adaptive regulatory approach that fosters innovation while prioritising consumer protection and maintaining financial stability. Regulators must be proactive in their efforts to monitor the evolving fintech land-scape and adjust their policies accordingly to create a sustainable and safe fintech ecosystem in Southeast Asia,” Haque tells ALB.
According to Athistha (Nop) Chitranukroh, a partner and director of Tilleke & Gibbins’ corporate and commercial group based in Bangkok, regulation and innovation are not in competition with each other.
“When it comes to new and complex products such as those being developed in the fintech sector, a clear and comprehensive regulatory framework can give businesses the confidence to make investments,” Athistha tells ALB.
In terms of consumer protection, while fintech has been instrumental in expanding banking and financial services to people who have traditionally been unbanked, lower levels of digital and financial literacy within the population pose a challenge for regulators, according to Athistha.
“Legislation that gives consumers information and control, such as data protection laws, and that protect consumers from malicious activities, such as cybercrime laws, are key tools for tackling such problems,” Athistha says.
REGIONAL DIFFERENCES
The regulatory frameworks for fintech can differ greatly among Southeast Asian countries, potentially affecting businesses operating in multiple markets in the region.
The disparities in the adoption of comprehensive and specific regulations are a notable feature of the regulatory landscape for fintech in Southeast Asia, according to Athistha.
Countries such as Malaysia, Singapore, and Thailand have adopted various regulations regarding as e-payments, electronic know-your-customer (e-KYC), peer-to-peer (P2P) lending, cryptocurrencies, and crowdfunding. By having supportive regulations and regulators who are proactive in engaging with these industries, these jurisdictions are able to promote innovation and encourage investment.
However, there is less in the way of specific regulations in countries such as Cambodia, Laos, and Myanmar.
“This poses challenges for fintech businesses looking to expand their operations into these jurisdictions, where a lack of legal clarity and understanding of the relevant technologies creates uncertainty over how specific business activities and product offerings will be regulated,” says Athistha.
Among them, Vietnam has proposed several regulations in the fintech space, and its recent implementation of comprehensive data protection legislation is a further encouraging sign.
“Many regulators in Southeast Asia have established regulatory frameworks for digital payments, through either general regulatory framework for the wider payment sector, or activity-based regulations that are specific to certain fintech industries like e-money, virtual currencies, digital payments, online lending, digital banking and remittances,” says Torres.
Different jurisdictions have varying approaches towards certain fintech categories. In some jurisdictions activities like P2P lending and virtual currencies are prohibited, while in others they are treated as unregulated or subject to licensing regulations. Some jurisdictions have bespoke regulatory frameworks that are similar to those of other jurisdictions. Additionally, some countries have introduced fintech regulatory sandboxes, such as Singapore, Malaysia, Thailand and the Philippines, which enable them to quickly address the rapidly evolving fintech landscape.
Torres points out that there are other jurisdictions that are more advanced in terms of fintech policies and regulatory framework. This impacts businesses operating in multiple jurisdictions since there are nuances that would entail more regulatory compliance and licensing for some that in other jurisdictions simply would not apply. These fintech companies would then need to tailor-fit their approach per country.
“There are also instances where fintech activities in one jurisdiction are permissible, while in others they are either prohibited, subject to regulatory limitations (e.g., nationality restrictions or capitalisation requirements) or subject to licensing moratoriums. In these instances, some fintech companies would need to shift their strategy to either acquisition, partnership, or joint venture arrangements with local partners,” says Torres.
Haque adds that these different licensing and registration requirements can lead to variations in the time and cost involved in setting up and expanding operations in different markets. “Some countries may have more stringent licensing and registration requirements for fintech companies, while others may have a more streamlined process.”
In addition, consumer protection regulations differ across countries, affecting the level of trust and confidance consumers have in fintech services. “Companies operating in regions with robust consumer protection standards may need to implement additional measures to comply with the requirements of other markets,” says Haque. Data privacy and security regulations also vary significantly, which impacts how fintech companies handle customer data and ensure data protection. “Companies may need to implement different data privacy measures in each market to comply with local laws. Related to this, some countries may have restrictions on cross-border data transfers, which can complicate data management for fintech companies operating across multiple markets,” says Haque. “The impact of these regulatory differences on businesses operating in multiple Southeast Asian markets can be complex and multifaceted. Fintech companies may need to navigate a complex web of regulations, leading to increased compliance costs and administrative burdens. Adapting to various regulatory environments may also require significant resources and expertise,” says Haque.
COLLABORATION NEEDED
Effective management of cross-border financial crimes and cybersecurity threats in Southeast Asia necessitates regulatory cooperation among the region’s regulators.
Athistha suggests that the Financial Action Task Force (FATF) Global Network and the FATF recommendations can play a significant role in providing a framework of measures to help regulators navigate and combat financial crimes effectively. It conducts regular assessments of each country’s laws and guides the regulators on the sufficiency of their regulatory regime and areas for improvement. For example, Myanmar is currently flagged as high-risk jurisdiction with deficiencies in its regime concerning counter-financial crimes, while Thailand has been found to have made progress in strengthening measures to tackle financial crimes.
“Regulators can collaborate and work together through this network, particularly with regards to combating cross-border financial crimes,” says Athistha.
To address cross-border financial crimes and cybersecurity threats effectively, regulators actively collaborate with other central banks and foreign financial authorities to exchange information, ideas and best practices on fin-tech and banking-related issues.
For example, there are central banks like Bangko Sentral ng Pilipinas, that have established formal memorandum of agreements with the Monetary Authority of Singapore and Central Bank of Mauritius for information sharing and capacity building that are intended to address cross-border financial crimes and money-laundering threats.
“Data privacy regulators also have collaborations to address data privacy and cybersecurity threats, and have actively participated in international forums in order to harmonise their respective legal and regulatory frameworks and exchange international best practices,” says Torres.
Haque encourages regulators to share information.
“Establishing channels for real-time information sharing among regulatory bodies in different countries is crucial to identify emerging threats quickly. This could include sharing data on suspicious transactions, cybersecurity incidents, and emerging trends in financial crimes,” Haque says.
Haque also suggests setting up joint task forces or working groups focused on specific areas, such as money laundering, terrorist financing, or cybersecurity. These task forces can devise strategies, exchange best practices, and develop common guidelines.
Harmonising regulations concerning fintech and cybersecurity across the region also helps as a coordinated approach reduces regulatory arbitrage and makes it easier for companies to navigate the complex regulatory landscape. In addition, Haque believes public-private partnerships can help combat cyber threats and financial crimes effectively. “Fintech companies can provide valuable insights and technical expertise, while regulators can offer guidance and regulatory support,” Haque says. “Regional collaboration enables regulators to pool their resources, expertise, and data to tackle cross-border financial crimes and cybersecurity threats in a more comprehensive and coordinated manner,” Haque says. “As fintech continues to evolve and operate across international boundaries, fostering strong regional cooperation becomes increasingly essential to safeguard the stability and integrity of the financial ecosystem in Southeast Asia.”
MODELS TO FOLLOW
Athistha sees Thailand as a great example of proactive collaboration with emerging players in the fintech sector to develop a comprehensive and effective regulatory system.
The Bank of Thailand (BOT) implemented a fintech regulatory sandbox that allows local financial institutions and new fintech companies to experiment with innovative products. It also will enable regulators to stay on top of emerging products and collaborate with developers.
“Thailand’s now ubiquitous QR payment system is just one of many products that emerged through this sandbox,” Athistha mentions.
Also, the BOT and the Securities and Exchange Commission of Thailand (SEC), which share oversight of fintech activities, have used a combination of new legislation and guidance to ensure that the regulatory system is adapting to new technologies and product offerings. For example, the Payment Services Act and the recently enacted Personal Data Protection Act have established general rules for fintech activities. Meanwhile, the Emergency Decree on Digital Asset Businesses and the BOT Notification on Peer-to-Peer Lending Businesses and Platforms establish more specific rules for fintech products seeing increased adoption by consumers.
“The SEC has made extensive use of public consultations, including consultations on initial coin offering (ICO) portals, utility tokens, and digital asset advertising rules, to ensure that its regulatory approach aligns with both business practices and consumer needs,” says Athistha. “Thailand, which is home to some of Southeast Asia’s largest fin-tech companies, has shown that regulation, including consumer protective regulation, benefits rather than hinders innovation.”
Torres also believes a regulatory sandbox could be a “game changer”. Ensuring that fintechs with novel and innovative business models have sufficient space to innovate and experiment under a regulatory sandbox model that adopts a risk-based approach is a good way to strike a balance between supporting innovation and regulation.
“Regulatory sandboxes, coupled with proactive collaboration and engagement by regulators with the industry players to better understand these technological advances could also empower the fintech ecosystem as it not only serves to support innovation but through active collaboration, regulators would have direct information that would minimise the information asymmetry,” Torres adds.
Torres also emphasises that it is crucial to have a more proactive approach in issuing regulatory clarity rather than a reactive or passive one, in order to create a more balanced regulatory environment for fintechs.
Singapore also implemented regulatory sandboxes that allow fintech companies to test their innovations in a controlled environment with relaxed regulatory requirements. Haque believes that this approach promotes innovation while providing regulators with insights into emerging risks and consumer protection concerns.
In addition, Singapore is careful to craft regulations to provide clarity on the treatment of cryptocurrencies and promote blockchain development. Such regulatory clarity helps attract blockchain-based fintech companies and projects to Singapore.
“These best practices from Singapore demonstrate the importance of regulatory innovation, collaboration, and flexibility in fostering a thriving fin-tech ecosystem while ensuring consumer protection and financial stability,” says Haque.
To stay ahead of the curve and to support the growth of fintech in the region, Athistha suggests that it is important for regulators to maintain open two-way channels of communication with stakeholders, including financial institutions, fintech companies, and law firms.
“Ultimately, businesses need a clear and stable regulatory environment to invest in innovation. Businesses see a benefit to working with regulators to help ensure that rules are effective and aligned with commercial and consumer practices,” says Athistha.
In addition, regulators should also ensure they are “nimble and responsive” in issuing new rules. While large framework legislations, such as data protection legislation, are important for establishing a firm regulatory foundation, it is equally important that regulators can quickly and easily issue subordinate legislation and guidance to respond to ever-changing technologies and products. Regulating businesses has become increasingly challenging for regulators due to the constant and rapid evolution of innovative business models. It is a delicate balancing act.
“In order to stay ahead and keep up with the emerging technologies, there should be stronger and more open collaborations between the government, fintech, start-ups, as well as incubators and innovators in order to bridge the information gap brought about by the complexities of these novel business models,” says Torres.
By sharing information with other jurisdictions to adopt international best practices, policies can be streamlined and a more dynamic fintech ecosystem can be developed. This ecosystem would allow for innovation while maintaining risk management mechanisms.
“Regulators should actively monitor the fintech landscape and conduct ongoing research to understand emerging technologies, business models, and market trends. This will enable them to anticipate potential risks and challenges associated with innovations,” says Haque.
Haque believes that responsible growth in the fintech industry can be fostered through collaboration with industry stakeholders and interagency collaboration.
“Establishing a collaborative relationship with fintech companies, industry associations, and technology experts is essential. Engaging in regular dialogues and consultations with stakeholders helps regulators gain insights into industry developments and potential risks,” says Haque.
“Collaboration among different regulatory bodies is essential, as fintech often operates at the intersection of various sectors, such as finance, technology, and data protection. Interagency coordination helps create comprehensive and consistent regulations.”
In addition, regulators should consider a flexible and adaptable approach to regulations. Rules that are too strict might hinder innovation, while regulations that are too lenient could pose unnecessary risks. It is crucial to have the capability to promptly update regulations as new challenges emerge.
“In my view, regulators can foster an environment that encourages responsible fintech growth while effectively managing potential risks. Striking the right balance between innovation and regulation is crucial for ensuring a thriving and sustainable fintech ecosystem that benefits consumers and the broader economy,” says Haque.
