Regulators are warning of emerging risks associated with the new technology-driven financial innovations that have the potential of spreading havoc in the ecosystem, hurting consumers and causing instability.
These concerns were expressed at the recently held 16th Annual Board Retreat of the Joint Financial Regulators Forum that took place in Naivasha, Nakuru County.
Regulators said that while these tech financial products and services are transforming the entire financial landscape, there is need for close monitoring of these innovations.
Under the spotlight include virtual assets and bundled financial products that have enhanced access, improved efficiency and boosted customer experience.
Regulators that are on the watchtower
The regulators, who included Capital Markets Authority, Central Bank of Kenya, Insurance Regulatory Authority, Retirement Benefits Authority, Kenya Deposit Insurance Corporation, Policyholders Compensation Fund and Sacco Societies Regulatory Authority, called for the need for targeted research and monitoring to mitigate the emerging financial stability risks while supporting innovation and financial inclusion efforts.
The forum pointed to reliance on third party technology service providers as a major source of risk, especially if that provider serves many clients. If the event of system failures, operations of such institutions or firms is likely to be compromised, affecting their ability to provide optimal services to customers.
Regulators have resolved to prioritize mapping of concentration risks associated with third party technology service providers and associated risks to the financial system.
Regulators noted that while emerging technologies such as Artificial Intelligence and Machine Learning have enhanced the speed and delivery of service provision, some market players, including providers and consumers are not able to quickly adopt.
The forum also agreed on the need to strengthen their supervisory capacity and tools to safeguard the system from money laundering activities and terror financing, to safeguard Kenya as a safe business and investment destination.
While Kenya has emergence of cutting-edge and numerous financial innovations, there are concerns that the prevailing consumer protection legal framework, is not adequately equipped to deal with the rapidly evolving marketplace.
At present, there is no emergency liquidity assistance for distressed financial sector providers or even adequate funds to compensate customers who lose out when a financial service provider collapses.
The 2024 FinAccess Household Survey reports that system downtime is a major issue faced by consumers; users of Micro Finance Institutions and digital Apps also suffer from unethical practices and hidden charges. The Survey found that 9.8% of mobile money users have reported losing money.\
Consumers of tech-driven financial products are also exposed to digital fraud and cyber threats, lack financial literacy while many fintech firms operate in a regulatory grey area, leaving consumers vulnerable to losses and disputes.
Landmines when using tech financial products, services
System failures, glitches or poor internet connectivity can disrupt service delivery and cause financial losses.
AI-powered financial products may perpetuate biases and discrimination if feed on biased data, leading to unfair outcomes for some consumer groups.
The FinAccess Survey also notes the more educated consumers can access diverse tech-financial products while those with less formal education are more reliant on informal, accessible options.
Overall, the survey findings indicate that Kenyans continue to access a diverse range of financial-tech services, with a notable increase in the use of innovative digital solutions like ‘buy now pay later,’ alongside traditional services such as
brick-and-mortar banks and SACCOs.
With the emergence of mobile trading Apps, the survey notes that the most prominent challenge impacting investors in the capital markets space was system downtime, affecting 7.0 percent of participants.
This issue is particularly significant for those dependent on digital trading platforms, where frequent outages can disrupt trading activities.
Regulators advisory on digital financial products
Consumers of tech financial services are urged to be cautious of phishing scams and verifying the authenticity of financial services providers. Monitoring accounts regularly for suspicious activity is also critical as well as reporting any concerns to regulatory bodies and agencies.
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