Call for clarification on the Artificial Intelligence Liability Directive

On 28 September, the European Commission published its proposal for the Artificial Intelligence Liability Directive which  complements and modernises the EU civil liability framework by introducing for the first time rules specific to damages caused by AI systems. 

The purpose is to lay down uniform rules in case of damages caused by AI systems and to establish broader protection for victims. The Directive is applicable to both individuals and businesses. The new rules will, for instance, make it easier to obtain compensation if someone has been discriminated against in a recruitment process involving AI technology.

It is proposed that five years after the entry into force of the AI Liability Directive, the Commission will assess the need for no-fault liability rules for AI-related claims if necessary.

Consequently, on 3 October, the Commission enabled relevant stakeholders to provide feedback on the proposed AI Liability Directive. All feedback to be received will be summarised by the Commission and presented to the Parliament and Council with the aim of feeding into the legislative debate.

As part of its mandate, ESBG replied to the Commission’s call for feedback on 2 December. In its response, ESBG supports the protection of consumers as well as adapting liability rules to the digital age, thereby setting out a framework for excellence and trust in AI.

However, ESBG understands from the proposed Directive that the presumption of a causal link in the case of fault is mainly a matter of “non-compliance of due diligence duties”. In this context, ESBG calls for clarification on what could be considered as non-compliance of due diligence duties. In particular, ESBG questions whether the presence of bias or discrimination could be considered a noncompliance of due diligence duties. Furthermore, clarification is necessary on what tools are available to providers and users of AI systems to refute the causal link.

Finally, as the AILD is a directive, members stress the importance to take the cultural and legal differences between member states into account when implementing. Different application across member states can lead to regulatory arbitrage where firms choose where to be domiciled according to the member states legislative application. Therefore, the directive should be aligned with the Rome I Regulation and the Rome II Regulation regarding the conflict of laws on the law applicable to non-contractual obligations.

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Call for clear scope of applicability of the Cyber Resilience Act

On 14 November, ESBG submitted its input to the European Commission’s call for feedback on the proposed Cyber Resilience Act, which was published in September. All feedback received will be summarised by the Commission and presented to the European Parliament and Council with the aim of feeding into the legislative debate.

On 15 September, the Commission published a proposal for a Cyber Resilience Act, which aims to protect consumers and businesses from products with inadequate security features. The Cyber Resilience Act introduces mandatory cybersecurity requirements for products with digital elements. It will ensure that digital products, such as wireless and wired products and software, are more secure for consumers across the EU. In addition to increasing the responsibility of manufacturers by obliging them to provide security support and software updates to address identified vulnerabilities, it will enable consumers to have sufficient information about the cybersecurity of the products they buy and use.

In the position paper, ESBG members welcome the Commission proposal and support the goal of only having secure software on the internal market. However, members believe that the Cyber Resilience Act leaves too much room for interpretation regarding its scope of applicability and therefore proposes that the Commission should make a clear scope-statement that would dissolve any uncertainty whether the software developed, operated, or marketed by financial institutions is in scope of this Act.

In addition, there are vertical initiatives that already regulate the cyber-resilience of hardware and software products used by certain sectors. This is the case of the Digital Operational Resilience Act (DORA) for the financial sector, a regulatory framework specifically designed and developed to ensure the digital operational resilience of the financial sector. Extending the scope of the Cyber Resilience Act to products manufactured by credit institutions may place additional burdens onto banks, on top of the already existing tight regulatory corset.

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Application of CGAP Customer Outcomes Framework in Uganda

Scale2Save Campaign

Micro savings, maximum impact.

The case study has applied the CGAP customer outcome indicator framework to test the impact of a new basic savings product positioned in the financial inclusion market and designed to encourage digital and/or remote account opening and transactions.

As a member of the WSBI and part of the Scale2Save program, a prominent retail bank volunteered this product for a case study.

The objective was to assess if the CGAP customer outcome indicator framework could be applied as a measuring tool to determine whether or not:

  • The design, positioning, performance and management of the product are working as intended;
  • The product is indeed improving the lives of target customers;
  • The bank is contributing to Uganda’s Financial Inclusion goals.

The CGAP customer outcomes indicators are generated from supply-side data and can be used internally by providers to measure their levels of customer-centricity. The ultimate objective, however, is for the jurisdiction’s authorities to have a quantifiable, comparable and consistent way to:

  • Detect which strategies, policies, practices, activities, products/services work for or against the customer;
  • Assess the impact of financial services at a market level for all customer segments; and
  • Determine if, and to what extent, providers in the sector are improving or detracting from national goals.

Since the focus of the Uganda case study is Financial Inclusion, focusing on savings, the jurisdiction-specific context was informed by the Bank of Uganda’s (BoU) Financial Inclusion Strategy, 2017. The five main strategic goals classified twenty gaps that the BoU had set out to address. These gaps were therefore used as the basis to map the global CGAP indicators to Uganda’s context.

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Driving formal savings: What works for low-income women

Scale2Save Campaign

Micro savings, maximum impact.

Gender-inclusive products need to be designed with women’s needs in mind. Yet, the real question remains: What services do female customers value, prioritize and need? This learning paper aims to contribute to the growing evidence base around this topic, building on findings from a recent Scale2Save Customer Research.

While financial inclusion is expanding globally, the gender gap in access to financial services and products persists. To close the gender gap in financial inclusion and improve women’s meaningful use of financial services, there is a clear need for financial service providers to transition toward gender-aware strategies to build tailored products that create opportunities for women and lower barriers in their lives.

This paper found that by carefully crafting the customer experience for women, financial service providers considerably amplified the adoption of formal savings products, thus significantly expanding their customer base while also contributing to financial inclusion for a traditionally excluded customer segment, such as women.

Scale2Save is WSBI’s most recent programme for financial inclusion. It operated in six African countries.

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Scale2Save


African woman trader

The art of change

Scale2Save Campaign

Micro savings, maximum impact.

A practical approach to changing behaviors of financial service providers for more meaningful outreach to  low-income people.

During six years of implementation, the Scale2Save programme for financial inclusion gathered significant learning on institutional transformation. This publication explores the leanings from change management processes within the programme’s partner financial service providers.

Is change possible without changing our behaviours and habits? No. Change is not possible without changing the way we do things. And this requires close accompaniment, trust, and energy.

This paper analyses the processes Scale2Save implemented with LAPO Microfinance Bank in Nigeria,  ADVANS Côte d’Ivoire and BRAC Uganda Bank Limited.

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Scale2Save


Digital Financial Inclusion in Nigeria and Uganda: opportunities and remaining challenges

Scale2Save Campaign

Micro savings, maximum impact.

Earlier this year, the World Savings and Retail Banking Institute (WBSI) programme for financial inclusion, Scale2Save, through the support of the Mastercard Foundation, hosted in-person knowledge exchange
events in Nigeria and Uganda. The workshops were attended by practitioners and experts from the financial sector, research institutions, civil society, and the media. Across the two events there were many
interesting discussions, however, the potential and challenges around digital financial inclusion (DFI) was a recurring theme across the two events. In this note we summarize key challenges and opportunities
for digital financial inclusion discussed during the two events as well as examples from Scale2Save partners and publications.

Authors: Amy Oyekunle and Daniel Joloba

This note was prepared by the Mastercard Foundation Savings Learning Lab, a six-year initiative
implemented by Itad to support learning among the Foundation’s savings sector portfolio programmes:
Scale2Save and Savings at the Frontier

DFI means providing digital access to formal financial services to excluded and underserved populations. Digital technology has played a significant role in changing the sector and advancing financial inclusion in recent years. This was particularly true during the COVID-19 pandemic, which saw an increased uptake of cashless services and clients using e-banking services, including mobile banking, Point-of-sales (PoS) transactions, and card payments. The Nigeria Inter-Bank Settlement Systems (NIBSS) estimates the volume of ATM transactions has grown exponentially in the last six years, more than doubling since 2015 to over 850M in 20191 and USD 340,314 mobile payments per day in Uganda by 20212 Additionally, data from Bank of Uganda (BoU)3 indicates that the number of active debit cards increased by 12.4% from 2.59m in March 2021 to 2.91m in March 2022 while debit card transaction volumes increased by 28.01% from 4.4 million transactions in March 2021 to 5.68 million in March 2022. Credit card transaction volumes increased by 62% from 142,350 to 230,910 transactions over the same period. However, there is an indication that digital transactions are declining and returning to pre-Pandemic levels and there are still challenges that need to be overcome if digital is to deliver on its transformational potential. Challenges such as the limited interoperability for card payments as well as cyber security threats still hamper the wider use of the digital platform

What are those challenges, and why do they matter
Digital platforms can expand access to financial services, but they also exclude. Access to financial services, particularly digital financial services is highly gendered and fraught with inequalities Usage of digital accounts remains low: there has been a steady increase in digital accounts being opened
– 45.3 million bank accounts were opened in Nigeria in January 20226

Infrastructure for digital transactions can be a barrier to access DFS: connectivity, electricity and
infrastructure required for digital financial inclusion are not always present or reliable in rural areas

Regulations have improved but are still a barrier to many potential customers: Even though the Central
Bank of Nigeria (CBN) has simplified the Know-your-client (KYC) regulations required for clients to open
accounts through the three-tier system of using the Bank Verification Number and National IdentificationNumber (NIN), FSPs say this is still a challenge.

Risks associated with digital transactions are high: Increased cases of accidental transactions and
security breaches associated with telcos and mobile apps are a deterrent to customers, diminishing trust
in an already fragile ecosystem.

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ESBG submitted its response to the EBA consultation on DGS contribution calculation

Focus

November 7, 2022

The European Savings and Retail Banking Group (ESBG) welcomes the initiative of the European Banking Authority (EBA) to launch a consultation aiming at reviewing its guidelines, which specify the methods for calculating the contributions to the Deposit Guarantee Schemes (DGS), as requested in Art 13(3) directive 2014/49/EU. The EBA analysed whether the original guidelines’ approach to determine the riskiness of institutions is appropriate. In particular, the EBA analysed whether institutions that required DGS interventions were among the riskiest according to the guidelines’ methodology.

Enhancing the proportionality between the riskiness and the DGS contribution.
The EBA has identified elements that should be improved:
• setting minimum thresholds for the majority of core risk indicators and adjusting their minimum weights to better reflect the indicators’ performance in measuring the risk to
the DGSs,
• introducing an improved formula for determining the risk adjustment factor of each member institution that ensures a constant relationship between the riskiness of institutions and their DGS contributions,
• specifying how to account for deposits where the DGS coverage is subject to uncertainty, including in relation to client funds, thus ensuring closer alignment between the amount of covered deposits of a credit institution and its contributions.

Further clarity is needed.

While ESBG members welcomed the EBA consultation, ESBG’s response introduced two main recommendations. First, the DGS should be requested to disclose a description of
the institution’s contribution to the DGS fund with the goal of enhancing the member institution’s understanding of their risk profile. Such communication could also encourage the institutions to lower their risk profile where necessary, which could contribute to financial stability.
A more balanced risk weight between indicators.

As a second point, ESBG advocates for a more balanced risk weight for the two following indicators: Return on Assets (RoA) and the Total Risk Exposure Amount/Total of Assets
(TREA/TA). According to the EBA analysis, the former provides a better indication of a potential DGS intervention than the latter. Consequently, the EBA proposes raising the weight of the RoA and lowering the weight of the TREA/TA. ESBG points out that this initiative is counterintuitive, as it benefits high-risk banks. Low risk remains the principal reason to avoid DGS intervention.

High-level position paper – Executive summary

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Driving financial resilience through formal savings among the low-income population

Scale2Save Campaign

Micro savings, maximum impact.

This paper provides a syntesis of research findings that help understand to what extent savings allow customers to increase financial resilience, being a key learning question for the programme.

For customers unable to use savings to cope with shocks, they primarily faced physical and service related challenges to using their savings for resilience purposes, in addition to barriers posed by the product features.

Approximately 70% of the FSP’s customers reported having used part of their savings.

FSP's customers using their savings

The research observed notable differences in financial security between young adults and older adults; young adults were more frequently unemployed, studying, or working temporary jobs compared to older adults. This was also reflected in reported incomes, as a higher proportion of young adults are earning less than
or around the national minimum wage in the target countries than older adults. Young customers were more likely to have been saving informally (42%), or not saving at all
(15%) prior to opening their savings accounts, compared to adult customers. This underlines the program’s impact in deepening access to formal savings products for young customers. Young customers were most compelled to save in case of unexpected emergencies, as reported by an average of 44% of them. (By comparison 34% of adults were saving for unexpected emergencies.) Given that the majority of young customers opened their savings accounts during the COVID-19 pandemic and have lower earnings
than adults, it is not surprising that many aimed to establish ‘safety nets’ that would enable them to cope with unforeseen emergencies.
Additionally, about 30% of young customers were also saving toward a specific goal, such as a dowry, celebration, studies, or others. Lastly, a quarter of young customers were saving with the intent of investing in a business. Research commissioned by Scale2Save in 2019 found that young adults exhibited a strong preference for self-employment. Young adults expressed a greater preference for self-employment over a steady job, and this appeared to strengthen with age. This study also found that young adults, and particularly young men seek to diversify their income sources to reduce risk. Together these factors likely contributed to young adults’ increased resilience to provide for their futures.

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ESBG responds to the EBA consultation on the supervisory handbook for IRB systems validation

On 28 October, ESBG responded to the European Banking Authority (EBA) consultation on the supervisory handbook for Internal Rating Based (IRB) systems validation. The handbook aims to clarify the role of the validation function as part of corporate governance, in particular in terms of scope of work and interaction with the credit risk control unit.

As a general comment, we stressed that organizational suspension of the validation function should be independent of the size of the bank. In addition, it should be ensured that the validation manual is free of inconsistencies with existing supervisory regulations such as the ECB Guide on Internal Models.
ESBG stressed that it would be helpful to consider the aspect of proportionality more closely. The validation approach proposed by the EBA hardly differentiates between the materiality of models/portfolios and model changes. On the contrary, the intensity and scope of validation activities must always be based on the expected data situation, the importance of the rating procedure, and the scope and complexity of the changes made.

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TOPIC: Prudential regulation

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ESBG short paper on the bank crisis management and deposit insurance framework (CMDI)

Position Paper | Prudential, Supervision and Resolution

Focus

October 27, 2022

The Banking Union is one the most relevant EU policy over the last decade. The financial crisis in 2008 and its subsequent sovereign debt crisis in the euro zone have revealed weaknesses inherent in the functioning of the banking industry and demonstrated the need to coordinate the supervision and to shape a common framework in Europe.

Created in 2014, the Banking Union was a powerful response aiming to ensure that the European banks are able to withstand the upcoming crisis in the future without recourse to taxpayers’ money. The Banking Union is based on three pillars:
i) the Single Supervisory Mechanism (SSM) set up rules on capital requirements mainly from the implementation of Basel agreement and gave to the European Central Bank the responsibility to coordinate this supervision;
ii) the Single Resolution Mechanism (SRM) established a Single Resolution Board (SRB) and a Single Resolution Fund (SRF) in order to ensure the orderly resolution of failing banks, while minimising their impact on the real economy and on public finances;
iii) , the Deposit Guarantee Schemes (DGS) aim to protect depositors in the case where their banks fail, and their deposits are not available anymore.
These new uncertain times worsened due to the high inflation and the war in Ukraine legitimates the ongoing implementation of Basel IV rules in the EU regulation. Indeed, a well-capitalised banking sector contributes to reinforce the resilience of the European economy. As regards the two other pillars of the Banking Union, the European Commission has been mandated by the Eurogroup to bring forward a legislative proposal for a strengthened Crisis Management and Deposit Insurance (CMDI) framework in June.

Without a political agreement between the Member States, the Eurogroup decided to postpone the introduction of a European Deposit Insurance Scheme (EDIS) which was included in the initial workplan drafted by the Eurogroup President Pascal Donohoe. Against this background and before the publication of the legislative package postponed at the beginning 2023, the European Savings and Retail Banks Group wishes to reiterate its supports to the current CMDI review and calls in the meantime for an evolution of the framework, not a revolution. Read our paper below:

ESBG’S PAPER

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