Digital Supervision

Experience of an IOPS member - Kenya

Nzomo Mutuku Chief Executive Office

Retirement Benefits Authority

October 5, 2018

Mexico City, Mexico CONSAR

“A Dynamic and Secure Retirement Benefits Sector”

KENYA PENSIONS FRAMEWORK Social Pension

NSSF Civil Service RBS

Occupational/Umbrella Schemes

Individual Schemes

Pillars Zero, NC One, C Two, NC Two, C Two, C

Legal Structure

Act of Parliament Benevolent

Act of Parliament Mandatory

Act of Parliament Mandatory

Trust Deed; some Statute

Trust Deed

Member -ship

Over 65 years, Means tested

Formal/ informal sector

Civil service, teachers etc.

Formal sector Voluntary,

Individuals formal & informal voluntary

Funding Exchequer Funded DC Provident (reform to Pension)

PAYGO DB (reform to DC funded)

Funded DB & DC

Funded DC

RBA Regn Exempt, Non Contb

Yes, Contb Exempt, Non Contb

Yes, Contb Yes, Contb 2

SECTOR PERFORMANCE

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Schemes: 1,300

2001 < 1.0bn

2010 4.4bn

2018 11.2bn

INDUSTRY SUMMAERY

Assets: US$

Members: 3.0 Million

Registered Service Providers

Managers: 11 Custodians: 10: Administrators: -

2001

Managers: 22 Custodians: 11: Administrators: 31

2017 Coverage: % of Labour Force

2001 13%

2010 15%

2017 20%

Trustees: DC – Min 4; Max 9

DB – 3 to 9 Over 6000 Trustees

PENSION SECTOR PLAYERS

RBA

RETIREMENT BENEFIT SCHEMES

1248

Trustees in charge of management of

schemes and members as beneficiaries

FUND MANAGERS

22

Role to advise trustees on available

investment vehicles, expected

risk and return

CUSTODIANS

11

Role to hold assets of scheme for safe keeping, e.g. cash,

securities, title documents of

schemes; settle transactions,

receive contributions

ADMINISTRATORS

31

Administrative duties of a scheme including keeping member records, computing and paying benefits;

liaising with service providers and the

regulator

PENSION ASSET INVESTMENTS IN KENYA

INVESTMENT GUIDELINES IN KENYA ASSET CLASS Max Cash and Demand (Fixed and Time) Deposits in Institutions Licensed under the Banking Act in Kenya

5 (30)%

Listed Corporate Bonds, Mortgage Bonds and Fixed Income instruments, loan stocks approved by CMA including CIS and GDRs

20%

Commercial Paper and other private company debt instruments with investment grade rating

10%

EAC Government Securities and Infrastructure Bonds issued by public institutions including CIS

90%

Shares listed in EAC securities Exchanges including CIS, ETFs and GDRs

70%

ASSET CLASS Max

Unlisted Shares and equity including CIS 5%

Exchange Traded Derivatives 5%

Real Estate Investment Trusts 30%

Private Equity & Venture Capital 10%

Offshore Investment in bank deposits, government securities, equities, rated corporate bonds including CIS

15%

Immovable Property in Kenya 30%

Guaranteed Funds 100%

Any Other Assets 10%

INVESTMENT PORTFOLIO INTERNATIONAL COMPARISON

0

10

20

30

40

50

60

70

80

Kenya Nigeria SouthAfrica Australia UnitedKingdom

Cash & Deposits Bills & Bonds Shares Land & Buildings

Mutual Funds Insurance Contracts Private Equity Other

RECENT SUPERVISORY REFORMS - I

1. Risk Based Supervision - officially adopted in Kenya in 2010. Overall Risk Score declined from 1.15 in 2011 to 0.524 in June 2017. New Toolkit introduced August 2018.

2. Trustee Development Programme Kenya - launched in August 2011 to improve scheme administration and governance over 4,629 trustees attended training of which 4,092 have been certified, including over 100 non Kenyans.

3. New & Alternative Investment Assets Classes - to align with market developments, enhance portfolio diversification, manage risks and boost returns including REITs (Development & Income), Private Equity & Venture Capital, Derivatives, Exchange traded funds (ETFs). Proposed additional Class for debt financing of Public Private Partnership (PPP) projects for infrastructure or housing

4. Market Conduct Regulation - created Market Conduct Department in 2016. to focus on Consumer Education, Consumer Protection and Good Governance for retirement benefits schemes

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5. Post-Retirement Medical Funds - require schemes to allow for additional voluntary contributions by a member to fund a medical fund to be accessed at retirement

6. Collaboration with other Financial Sector Regulators – on Information sharing, financial stability financial education and literacy programmes – possible merger in the near future

7. National Retirement Benefits Policy - Taskforce led by The National Treasury with RBA as Secretariat is working on the Retirement Benefits policy for necessary for proper coordination, governance and development of the sector

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RECENT SUPERVISORY REFORMS - II

DIGITIZATION OF FINANCIAL SERVICES

v  In the last decade, we have witnessed tremendous changes in financial services provision – globally & more so in Africa

v  Changes occasioned by new technologies;

v  Internet – internet banking

v  Mobile Phone – Mobile phone based financial services

v  Cryptocurrencies

v  Change has come in fast & furious – more or less catching us unawares

v  In Africa – main cause was due to push for financial inclusion

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FINANCIAL INCLUSION IN AFRICA

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v  Financial Inclusion has improved significantly in Africa [Various financial inclusion surveys over the years]

FINANCIAL INCLUSION IN KENYA

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v  Advent of Mpesa services in Kenya in 2007 increased population with access to formal financial services from 26% in 2006 to 75% in 2016 [FinAccess Survey 2016]

75.3

66.9

40.5

26.7

7.2

7.8

26.8

32.1

17.4

25.3

32.7

41.3

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2016

2013

2009

2006

FINANCIALINCLUSIONINKENYA

Formal Informal Excluded

Use Case Examples

Money Transfer

Retail Payments

Credit

Services

Government

Pensions

DIGITIZATION IN FINANCIAL SERVICES

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DIGITIZED FINANCIAL SERVICES IN KENYA - I

v  Digitized financial services - particularly mobile phone based are having a transformative impact, especially in low-income economies.

v  In Kenya, the digitized financial service plays a dominant role in rural areas, with important vertical integration consequences for existing financial service providers.

v  Increased use of mobile phone financial services by both individuals and corporate organizations: Person to person [P2P] dominates, business to persons [B2P] and persons to business [P2B] - are all increasing.

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DIGITIZED FINANCIAL SERVICES IN KENYA - II

v  Digitized financial services, esp. Mobile money transfers, appeals to consumers across the geographical divide.

v  Digital technology helps to reduce costs, expand scale, and deepen the reach of financial services & is critical to growing financial inclusion.

v  However, these opportunities also come with new risks & regulators face the challenge of ensuring that the benefits of these innovations are secured, and risks effectively managed.

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Mbao Pension Scheme

v  Informal sector biggest employer in Kenya (85% of workers)

v  Cannot make predetermined monthly contributions as prescribed by normal pension schemes towards their retirement savings

v  Mbao Pension Plan targeting informal sector launched in June 2011.

v  Fully mobile phone based including contributions, statements and receipt of benefits.

v  Membership stands at over 100,000 members

v  Challenge is sustaining persistence of contributions from members

Other digital services in pension industry

v  Online and mobile pension administration services

v  Voting through phone during pension scheme Annual General Meetings

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DIGITIZATION IN PENSION SERVICES

v  Block Chain and Distributed Ledger  §  Anti-Money Laundering (AML) and Know Your Customer

(KYC) requirements for pension enrolment. §  Connect penion parties parties to each other with digital

records and contracts without passing through intermediaries .

v  Cloud computing: §  Ability to reorganize IT cost structure by moving it from

capital expenditure (Capex) to operational expenses (Opex) §  Cost reduction and improved cost predictability §  Increased security and controls through automation §  Facilitate access to enhanced capabilities (i.e. analysis of

massive amounts of data) 17

EMERGING USES OF DIGITIZATION IN PENSION SERVICES - I

v  Platforms and dashboards

§  “pensions dashboards” to give members and beneficiaries an easy to use overview of all of their pension savings including state pensions, in one place.

v  Digital auto –enrolment   v  Insurance and Internet of Things (IoT)  

§  Insurance companies can use digital information to set individual rates. Can same extend to pensions?

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EMERGING USES OF DIGITIZATION IN PENSION SERVICES - II

DIGITIZED FINANCIAL SERVICES EMERGING RISKS - I

v  Cyber Crime – Cyber crime fraud is notorious in digital financial services. Fraud crime risk is multi-faceted and relates to several other risks, e.g., technology risk. It is also a significant driver of reputational risk. Large cases of fraud in mobile money have been reported over the last few years that have caused huge financial damages; due to customer, agent, and employee fraud from creating ghost accounts and conducting fraudulent transactions.

v  Data Privacy Security – customers data can land into wrong hands digitally. Hacking risks, including the vulnerability of cheap smartphones to malware, give rise to concerns about data security

v  Use of Agents - while it is a way of access to financial services, agent-based services carry significant drawbacks. Due to the physical distance between agents and the provider or the agent network manager, certain challenges are arising in effective training and oversight and recourse mechanisms.

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v  Technology Risk - technology failure that leads to the inability to transact. It is closely linked to operational risk. Transactions within a DFS travel through several communications systems and devices in order to initiate the transaction, transfer funds, and communicate confirmations with clients. The process may be exposed to potential breakdowns from a number of sources e.g. hacking, power failure, system faults etc., and any breakage in this chain leads to an inability to complete a transaction.

v  Supervisory & Regulatory Frameworks Redundancy §  structural changes in the financial services industry, §  entry of non-regulated players, §  Failure of regulators to understand products.

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DIGITIZED FINANCIAL SERVICES EMERGING RISKS - II

REGULATORY & SUPERVISORY RESPONSES TO DIGITIZATION - I

v  Need for responsive Supervisory & Regulatory Framework [CBK for introduction of Mpesa was innovative through a wait & see approach akin to Sandbox methodology – and today better regulates mobile financial services and so is RBA with Mbao Independent Pension Plan]

v  Responsive Supervisory Framework have emerged to;

v  help regulatory agencies digitize data, operational procedures, and automate the regulatory process.

v  proactively monitor financial institution’s transactions or client’s data and respond to a compliance violation in a shorter time.

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v  In the Kenyan we have adopted Sup Tech through;

v  Submission of statutory returns online

v  Grow pension coverage to informal sector workers via a mobile phone tech. that is simple, cheap and flexible thus enabling submission of contributions 24/7 from anywhere with network coverage

v  Provision of an online whistle blower portal

v  Online communication with industry players,

v  Where regulators have a development mandate like Kenya, they are part of the innovation development process consequently affording them an early learning process and timely provision for an innovative regulatory framework for the innovations, etc.

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REGULATORY & SUPERVISORY RESPONSES TO DIGITIZATION - II

v  Emergence & Use of RegTech

v  The Technology emerged to solve challenges arising from a technology-driven economy and introduction of digital products which has increased incidences of data breach, cyber hacks, money laundering and other fraudulent activities.

v  Regtech companies work in collaboration with financial institutions and regulatory bodies, and utilize cloud computing and big data for sharing information. Cloud computing is a low-cost technology with the ability to share data in real time and securely with various entities.

v  Regtech tools monitor online transactions in real time in order to identify issues or irregularities in the digital payment sphere.

v  Any outliers observed are relayed to concerned financial institutions for analysis and determination if a fraudulent activities are taking place.

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REGULATORY & SUPERVISORY RESPONSES TO DIGITIZATION - III

CONCLUSION

v  Providers of digitized financial services must keep constant watch over emerging risks.

v  Supervisory and Regulatory frameworks must respond to the emergence of digitized financial services.

v  In Kenya we noted the ball game had changed and Regulators could not afford not to change with it.

v  It is important to understand innovations in order to protect consumers through innovative regulation & supervision.

Thank you

www.rba.go.ke

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