Supervision of Banks and Nonbanks Operating through Agents

04 August 2015
Supervisors are challenged to build regulatory and supervisory frameworks that maintain financial stability and reduce the risk of money laundering and financing of terrorism across bank and nonbank providers that use agents, while protecting consumers and pursuing the objective of financial inclusion.
To date, limited research has been undertaken about how providers identify, classify, and manage risks related to the use of agents and how supervisors assess providers for that matter. Further, this is an area that continues to develop rapidly alongside the dynamic path of evolution of financial inclusion through digital means and the increasing types of institutions for which supervisors are becoming responsible. At the same time, supervisory resources are a constraint in many developing countries where agents are being used in increasing scale. This paper therefore provides an early attempt to help supervisors implement an effective risk-based approach to agent supervision that considers the linkages among the main policy objectives of financial inclusion, stability, integrity, and consumer protection.
This paper draws from research conducted on a sample of nine “leading” countries, defined as having large, diverse agent networks that continue to grow rapidly and where business models are evolving fast (Brazil, Colombia, Kenya, Mexico, Pakistan, Peru, the Philippines, Tanzania, and Uganda). While the paper describes aspects of the supervisory practices in these countries, it also draws from review of literature about other markets (including developed economies when relevant), international guidance, and standards for financial supervision (e.g., those set forth by the Basel Committee on Banking Supervision, the Joint Forum, the Financial Stability Board, and the Committee on Payments and Market Infrastructures).  
The following is based on a discussion of agent-relevant practices in the researched countries as well as supervisory concerns expressed through this research; authors’ observations are provided in the form of “insights for supervisors” that comprise approaches and measures that are general enough to be useful in a variety of contexts. Still, some country practices and authors’ normative insights may not be applicable to all supervisors. 
Generally speaking, supervisors in researched countries grouped what is perceived to be the major agent-related risks under consumer, operational, and money-laundering/terrorist-financing (ML/TF) risk. Consumer risk appears to be one of two key concerns of researched supervisors and is gaining increased attention. Issues such as fraud, unauthorized fees, lack of receipts, inadequate dispute resolution procedures, and insufficient liquidity at agent premises all impact consumers. The other key concern is that agents, as a new channel of the financial institution, may introduce new operational risk events, associated for example with IT continuity, contingency planning, and the internal controls of the financial institution. ML/TF risk was also raised as an issue, but was far more country-specific relative to the other risks. Existing country practices to mitigate risks are described for information purposes only; the authors are explicit on specific country practices that may not necessarily be considered “good practice.”