By Robin Newnham, Head of Policy Analysis, AFI

AFI’s Global Standards Proportionality Working Group (GSPWG) has made crucial contributions in advancing peer learning between members and global standard setting bodies (SSBs) on the practical application of global standards in alignment with financial inclusion goals, strategies and policies.

Global standards are essential to the safety and stability of the financial system, playing a key role in minimizing – though not eliminating – the risk of another 9/11 or global financial crisis, through recommendations on anti-money laundering and countering the financing of terrorism (AML-CFT) and macroprudential regulation of financial institutions.

Over the past decade, GSPWG has been crucial in bringing policy development and implementation by AFI members, resulting in 42 policy changes across their jurisdictions. The backbone of these changes is the process of information sharing, exchange of knowledge, practices and experiences, culminating in 12 knowledge products that are widely used across the AFI network.

Developing inclusive financial integrity

In its first phase, from 2010-2014, the working group (then known as the Financial Integrity Working Group) focused on the proportionate implementation of a risk-based approach to AML-CFT, as recommended by the Financial Action Task Force (FATF).

Among the major outputs was a guideline note that supported AFI members in applying simplified due diligence to enhance access to basic banking and mobile money products, and the appropriate implementation of flexibility permitted in FATF standards and guidance.

Proportionate AML-CFT has continued to be an important part of GSPWG’s focus while increasingly taking on the consideration of risks and opportunities of technological innovation in areas such as digital identity and regulatory technologies, leading to the development of the Inclusive Financial Integrity Toolkit in 2020.

Expansion into inclusive financial stability

In 2014, GSPWG significantly expanded its scope by addressing the application of proportionality across all financial standards and establishing new subgroups covering the Basel Framework, deposit insurance and e-money, and shadow banking.

Here, the working group was pivotal in global dialogue with SSBs by developing a paper on the impact of global standards on national financial inclusion objectives, which was presented to SSB heads at a meeting in Basel.

The following year, GSPWG hosted a global symposium where participants adopted a resolution that reinforced the importance of proportionality in advancing a balanced approach to financial inclusion, stability and integrity. It also supported the AFI membership’s endorsement of the 2015 Moscow Resolution on Shadow Banking and Financial Inclusion, and the 2016 Bali Outcome Statement on the linkages between financial inclusion and financial stability.

Stemming the tide of de-risking

A key role of GSPWG has been in contributing AFI member perspectives into the global dialogue with SSBs. Nowhere has this been more true than in dealing with de-risking by global financial institutions, which has negatively impacted correspondent banking relationship and remittance corridors connecting small island states and other impacted jurisdictions to the international financial system.

Elevating the global voice of AFI members led to FATF announcing in 2014 that de-risking actions were not consistent with the risk-based approach to AML/CFT, and the establishment of a four pillar action plan by the Financial Stability Board.

While de-risking remains a challenge today, GSPWG continues to be vigilant in monitoring progress, engaging with SSBs and global regulators as well as exploring potential technological solutions.

SSB mandates integrate financial inclusion

SSBS have made consistent and strengthening efforts to ensure that financial inclusion considerations and impacts are integrated into their work that have resulted in, among others, simplified identification and verification procedures for products with assessed lower risk such as mobile money accounts.

At the same time, they have also increased their engagement with developing countries by working through regional chapters and consultative groups while standard setters, such as the International Organization of Securities Commissions and the International Association of Deposit Insurers (IADI), include a much broader representation of developing countries in their memberships.

To further such dialogues and peer learning with SSBs, AFI became a formal partner of IADI in 2015, as well as an official observer in FATF regional bodies in Africa, Asia-Pacific and Latin America.

Global standards amid COVID-19

In the context of COVID-19, global standards for financial stability and integrity, particularly those implemented in the aftermath of the global financial crisis of 2007-8, have created a much more resilient financial system able to weather the worst impacts of the current crisis.

Crucially, standards have also allowed for flexibility that has been utilized in the current context. Simplified or electronic due diligence in FATF standards have enabled emergency social welfare funds to be transferred to recipients without the hindrance of excessive customer verification requirements. Meanwhile, for the Basel Framework, the drawing down of capital and liquidity buffers by financial institutions provides continued lending to MSMEs and the real economy.

Many AFI members have harnessed this flexibility to enhance the effectiveness of their COVID-19 policy responses. Careful attention is required for the timely unwinding of crisis response measures, the early signs are that global standards for financial integrity and stability will help protect the financial system from the worst impacts of the crisis, thereby contributing in turn to a more resilient and inclusive recovery.

Emerging issues

Over the past decade, significant progress has been made in aligning the goals of financial stability, integrity and inclusion to the mutual benefit of each policy objective. Moving forward, the pace of technological innovation and other crises to detail progress will present new opportunities and risks that GSPWG will need to consider. In addition, global standard setters and national policymakers need to consider how to prepare financial systems for future crises and systematically integrate risks into both financial stability and financial inclusion policymaking, particularly with climate change and the rise of FinTech and other non-bank financial institutions.