Digital ID to Enhance Financial Inclusion: A toolkit for regulatory authorities

21 November 2021

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Digital ID systems have the potential to improve the reliability, security, privacy, and efficiency of the process of identifying individuals in the financial sector, to the benefit of both customers and regulated entities. However, digital systems also present a variety of technical challenges and risks of failure. Well-design policies, and digital ID system design that fosters both inclusion and trust, are fundamental to mitigating such risks and guarding against challenges. Driven by the rapid growth in digital payments, which requires a better understanding of how individuals are being identified and verified in the world of digital financial services, the Financial Action Task Force (FATF) released Digital Identity, its guidance on digital ID, in 2020. This document will focus on the policy considerations of digital ID and financial inclusion, building on the 2013 FATF guidance on financial inclusion, the 2018 G20 Digital Identity Onboarding for the G20 Global Partnership on Financial Inclusion, the 2020 digital ID guidance from the FATF, Principles on Identification for Sustainable Development, Enhancing Cross-Border Payments: Building Blocks of a Global Roadmap, and, finally, practical country experience with ID needs and digital ID implementation, where available. This toolkit aims to provide direction for financial-sector regulators on how to leverage digital ID systems and digital ID solutions to enhance Customer Due Diligence practices.

FSB Plenary meets in Basel

18 November 2021

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Ref: 32/2021

The Financial Stability Board (FSB) Plenary met today in hybrid format, with some members attending in person in Basel and others attending virtually. Members discussed vulnerabilities in the global financial system, reviewed issues of particular relevance to Emerging Market and Developing Economies (EMDEs) and agreed the FSB’s work programme for 2022.

Financial stability outlook

The Plenary discussed the outlook for financial stability and any actions needed to address identified vulnerabilities in the global financial system.

Key current vulnerabilities relate to the rise in indebtedness across sovereigns, non-financial corporates and households in response to COVID-19. These include higher debt burdens and the nexus between these three sectors and the financial system. Embedded leverage in the financial system may add to vulnerabilities, as well as risks building up in real estate in a number of jurisdictions. Accommodative financial conditions globally have kept debt servicing costs low and supported asset prices, amid a continued search for yield. Rising interest rates and greater divergence of economic and financial conditions between advanced economies and EMDEs could expose some of these vulnerabilities. The FSB will continue to monitor these risks.

These developments underline the need to reinforce global financial system resilience. Liquidity mismatches, along with other factors, could lead to pressures in some non-bank financial intermediaries under stressed conditions. A progress report on the FSB’s work programme to enhance the resilience of non-bank financial intermediation (NBFI) was published last month. It includes initiatives to assess and address such vulnerabilities, including policy proposals to enhance the resilience of money market funds. Moreover, members recalled the importance of rebuilding macroprudential policy space going forward.

Members also discussed a number of other emerging challenges. These include the financial system’s exposure to the physical and transition risks posed by climate change, and members emphasised the growing vulnerabilities for the financial system from the use of crypto-assets. The FSB will provide an updated assessment of the financial stability implications of crypto-assets to the G20 in February 2022.

Scarring effects from COVID-19

The extraordinary policy response by public authorities has been key to limiting the economic fallout from COVID-19. At the same time, the massive public credit provision (both directly and through loan guarantees) has resulted in an unprecedented level of gross debt in non-financial companies (although in some cases balanced by increased cash holdings), and also in other sectors of the economy. The Plenary discussed the financial stability implications, not only from debt overhang but also from broader risk of scarring effects of the pandemic on the financial system.

The FSB will publish a discussion paper to provide a basis for a dialogue between the public and private sector on emerging policy approaches and industry practices that could prove effective to support a smooth transition out of debt overhang issues.

Issues affecting EMDEs

The FSB held its annual EMDEs Forum to discuss issues of particular relevance to the EMDE members of the FSB and its six Regional Consultative Groups.

A key challenge for EMDEs is managing the exit from COVID-19 support measures against a backdrop of diverging growth patterns across regions and rising long-term interest rates. Many EMDEs face trade-offs between keeping in place measures to support the financing of the real economy, and preserving, or restoring, policy space. Potential cross-border spillovers from an unwinding of COVID-19 measures in advanced economies add to the challenges. The Plenary also discussed the importance of addressing possible longer-term effects of COVID-19 on EMDEs’ financial systems and preserving their ability to support economic growth.

COVID-19 has accelerated the trend toward digitalisation of financial services, particularly in EMDEs. This has helped to alleviate the economic impact of the pandemic by facilitating remote access to financial services, but digitalisation also raises new financial stability issues. Members discussed the implications for financial stability in EMDEs of accelerating digital innovation, including rapidly evolving crypto-asset markets.

Implementation of resolution reforms

The Plenary discussed key issues in completing resolution reforms going forward, including follow-up work to close gaps identified in the evaluation of the effects of too-big-to-fail reforms for systemically important banks. The 2021 Resolution Report, which marks the tenth anniversary of the adoption of the FSB Key Attributes of Effective Resolution Regimes for Financial Institutions, will be published in early December.

FSB work programme

Members discussed the FSB’s work programme for 2022, including deliverables to the Indonesian G20 Presidency. The main priorities for the FSB’s work include: (i) international cooperation and coordination in financial authorities’ response to COVID-19; (ii) enhancing the resilience of the NBFI sector and follow-up to the FSB’s Holistic Review of the March 2020 market turmoil; (iii) containing the risks from the use of crypto technology, including unbacked crypto-assets, stablecoins and decentralised finance, while harnessing the benefits; (iv) assessing and addressing financial risks from climate change; and (v) finalising and monitoring implementation of the post-2008 crisis reforms. The finalised 2022 work programme will be published in January.

Plenary members expressed their gratitude for Randal Quarles’ leadership and commitment in chairing the FSB during the past three years, and look forward to working with Klaas Knot, who will take over as FSB Chair on 2 December 2021.

Notes to editors

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Governor, US Federal Reserve; the FSB’s Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Application Paper on Supervisory Colleges

11 November 2021

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The Application Paper on Supervisory Colleges describes the processes and practices related to the establishment and functioning of supervisory colleges for insurance groups with cross-border activities. In particular, the paper supports observance of Insurance Core Principle (ICP) 3 (Information Sharing and Confidentiality Requirements) and ICP 25 (Supervisory Cooperation and Coordination).

The objective of this Application Paper is to foster an understanding of the work of supervisory colleges and to explain the role and involvement insurers may have in supervisory colleges. This Application Paper, as a publicly available document, focuses on those aspects of supervisory college operations that are most relevant from the perspective of the insurance industry.

The paper was revised from its original version published in 2014 to reflect revisions to ICPs 3 and 25 and the adoption of ComFrame, as well as to include practical experience with establishing and managing supervisory colleges.

Application Paper on Combating Money Laundering and Terrorist Financing

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The purpose of this Application Paper is to provide information and advice on how money laundering (ML) and terrorist financing (TF) can occur within the life insurance sector and on measures to mitigate the associated risks.

The paper supports observance of ICP 22 (Anti-Money Laundering and Combating the Financing of Terrorism) and takes into account the FATF (Financial Action Task Force – the intergovernmental global money laundering and terrorist financing standard setter) Recommendations and their “Guidance for a Risk-Based Approach in the Life Insurance Sector”. The paper was revised from its original version published in 2013 to reflect subsequent developments, including the adoption of a revised ICP 22 and various updates of the FATF Recommendations.

While Insurance Core Principle (ICP) 22 on Anti-money laundering and combating the financing of terrorism (AML/CFT) and the accompanying standards and guidance apply to insurance supervisors, this paper is directed to life insurers and intermediaries.

Effective Implementation of FSB Principles for Sound Compensation Practices and Implementation Standards: 2021 progress report

4 November 2021 | PDF full text (1,012 KB)

Compensation practices in large financial institutions were one of the key contributing factors to the excessive risk-taking that was prevalent in the run up to the 2008 global financial crisis.

This progress report assesses the implementation of the FSB’s Principles and Standards for sound compensation practices and how compensation practices have evolved since 2009.

The report covers the compensation practices of the largest financial institutions in the banking, insurance and asset management sectors. The report describes regulatory and supervisory developments; the functioning of governance mechanisms for compensation by firms; the effective use of metrics/criteria and compensation tools; and legal and regulatory challenges to the effective use of compensation tools.

It highlights uneven progress toward implementing the Principles and Standards, with banks relatively more advanced than insurance and asset management firms. This may reflect the more pressing need for banks to align compensation with risk-taking following the 2008 global financial crisis.

Against this backdrop, this report focuses on:

  • The effectiveness of compensation frameworks. A common approach to assess employee performance and determine variable compensation is to use a balanced scorecard based on key performance indicators, complemented by other inputs. The report notes that it is critical to establish and apply such a framework so that it promotes a sound risk culture in a firm. While in-year adjustments and malus are commonly used, the use of clawback is not widespread due to ongoing legal and practical constraints. The report advocates incorporating clawback terms and severance clauses in employment contracts to enhance their enforceability and effectiveness.

  • Emerging trends. The report notes the increased use of non-financial measures and disclosure of compensation-related information to shape and promote a sound risk culture and positive behaviours, as well as to contribute to robust risk management. Firms are increasingly incorporating environmental, social and governance (ESG) aspects to drive accountability for delivering outcomes. This must be underpinned by robust governance, as the increasing application of non-financial measures requires the Board and internal control functions to use discretion and judgement appropriately.

  • Experience during the COVID-19 pandemic. The report finds that most existing compensation frameworks, and associated governance mechanisms, have demonstrated sufficient flexibility to date. However, while banking authorities in most jurisdictions have powers to direct firms to hold back and/or limit bonuses, especially in cases where there are concerns about capital conservation, or to increase deferral periods, this is much less prevalent in the asset management and insurance sectors.

FSB highlights implementation progress and gaps on effective compensation practices in financial institutions

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+41 61 280 8477
[email protected]
Ref: 31/2021

The Financial Stability Board (FSB) today published a progress report on the implementation of its Principles for Sound Compensation Practices (Principles) and their Implementation Standards (Standards) in financial institutions.

The report covers the practices of the largest financial institutions in the banking, insurance and asset management sectors. It highlights uneven progress toward implementing the Principles and Standards, with banks relatively more advanced than insurance and asset management firms. This may reflect the more pressing need for banks to align compensation with risk-taking following the 2008 global financial crisis.

Against this backdrop, this report focuses on:

  • The effectiveness of compensation frameworks. A common approach to assess employee performance and determine variable compensation is to use a balanced scorecard based on key performance indicators, complemented by other inputs. The report notes that it is critical to establish and apply such a framework to promote a sound risk culture in a firm. While in-year adjustments and malus are commonly used, the use of clawback is not widespread due to ongoing legal and practical constraints. The report advocates incorporating clawback terms and severance clauses in employment contracts to enhance their enforceability and effectiveness.

  • Emerging trends. Non-financial measures and disclosure of compensation-related information are increasingly used to shape and promote a sound risk culture and positive behaviours, as well as to contribute to robust risk management. Firms are increasingly incorporating environmental, social and governance (ESG) aspects to drive accountability for delivering outcomes. This must be underpinned by robust governance, as the increasing application of non-financial measures requires the Board and internal control functions to use discretion and judgement appropriately.

  • Experience during the COVID-19 pandemic. The report finds that most existing compensation frameworks, and associated governance mechanisms, have demonstrated sufficient flexibility to date. However, while banking authorities in most jurisdictions have powers to direct firms to hold back and/or limit bonuses, especially in cases where there are concerns about capital conservation, or to increase deferral periods, this is much less prevalent in the asset management and insurance sectors.

Notes to editors

The 2008 global financial crisis highlighted that compensation practices in large financial institutions were one of the key contributing factors to the excessive risk-taking that was prevalent in the run up to the crisis. Following the crisis, the FSB developed the Principles and Standards to promote sound compensation practices and align compensation with prudent risk-taking at significant financial institutions. The Principles and Standards require the financial industry to align employee incentives with risk and profitability of the firm over different time horizons.

This is the FSB’s seventh progress report on the implementation of the Principles and Standards. The report describes regulatory and supervisory developments; the functioning of governance mechanisms for compensation by firms; the effective use of metrics/criteria and compensation tools; and legal and regulatory challenges to the effective use of compensation tools. It incorporates input from FSB jurisdictions and covers the period 2020-21, including the COVID-19 pandemic. It also incorporates insights from an industry workshop held in May 2021.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Governor, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Taking a system-wide perspective: the key to financial resilience

3 November 2021

FSB updates the G20 on its work to enhance resilience in non-bank financial intermediation

1 November 2021

Press enquiries:
+41 61 280 8477
[email protected]
Ref: 30/2021

The Financial Stability Board (FSB) today published a report describing the progress over the past year and planned work to enhance the resilience of non-bank financial intermediation (NBFI). The report was delivered to G20 Leaders ahead of their Summit last weekend.

NBFI has grown considerably over the past decade – to almost half of global financial assets – and become more diverse. However, the March 2020 market turmoil underscored the need to strengthen resilience in this sector, to ensure a more stable provision of financing to the economy and reduce the need for extraordinary central bank interventions. The FSB’s NBFI work programme includes analytical and policy work that builds on the lessons from the turmoil.

The report provides an overview of the NBFI ecosystem and a framework for analysing the availability of liquidity and its effective intermediation under stressed market conditions. Indeed, the ability of market participants to manage risks efficiently and minimise market dislocations when adjusting their portfolios is a key determinant of the functioning and resilience of the NBFI ecosystem. These dislocations become more likely in the case of large imbalances between liquidity supply and demand. NBFI resilience therefore depends on the behaviour of different types of entities in the NBFI ecosystem as well as on the infrastructure and activities that connect those entities together, and with other parts of the financial system.

The main focus of work to date has been on assessing and addressing vulnerabilities in specific NBFI areas that may have contributed to the build-up of liquidity imbalances and their amplification. This includes: policy work to enhance the resilience of money market funds; work to assess liquidity risk and its management in open-ended funds; work to examine the structure and drivers of liquidity in core government and corporate bond markets during stress; an examination of the frameworks and dynamics of margin calls in centrally and non-centrally cleared derivatives and securities  markets; and an assessment of the fragilities in USD cross-border funding and their interaction with vulnerabilities in emerging market economies. The NBFI progress report describes the key findings to date and next steps in all of these areas.

Building on these findings, the FSB’s work going forward aims to develop a systemic approach to NBFI. It involves enhancing the understanding of systemic risks in NBFI to strengthen their ongoing monitoring; and, where appropriate, developing policies to address such risks. The focus of policy work is to ensure that the current policy toolkit is adequate and effective from a system-wide perspective, drawing on the lessons from the March 2020 market turmoil.

The report details the FSB’s work programme on NBFI for 2022 and beyond.

Notes to editors

The FSB published in November 2020 a Holistic Review of the March Market Turmoil, which lays out a comprehensive and ambitious work programme for strengthening the resilience of the NBFI sector while preserving its benefits. This work is being carried out within the FSB as well as by its member standard-setting bodies and international organisations, to ensure that relevant experiences and perspectives are brought to bear.

The first deliverable of the NBFI work programme was the FSB report in October 2021 setting out policy proposals to enhance money market fund resilience. In addition, further to their analysis of margining practices during the March 2020 market turmoil, the BCBS, CPMI, IOSCO have issued a consultative report on potential areas for further work, which may inform policy consideration. Work is ongoing in other areas under the NBFI work programme and additional reports with findings and any policy implications will be published during 2022.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Governor, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Enhancing the Resilience of Non-Bank Financial Intermediation: Progress report

| PDF full text (1 MB)

The March 2020 turmoil has underscored the need to strengthen resilience in the NBFI sector.

This report describes progress to date and planned work by the FSB, as well as by standard-setting bodies (SSBs) and other international organisations, to enhance the resilience of non-bank financial intermediation (NBFI).

NBFI has grown considerably over the past decade – to almost half of global financial assets – and become more diverse. However, the March 2020 turmoil underscored the need to strengthen resilience in this sector, to ensure a more stable provision of financing to the economy and reduce the need for extraordinary central bank interventions. The FSB’s NBFI work programme includes analytical and policy work that builds on the lessons from the turmoil.

The report provides an overview of the NBFI ecosystem and a framework for analysing the availability of liquidity and its effective intermediation under stressed market conditions. Indeed, the ability of market participants to manage risks efficiently and minimise market dislocations when adjusting their portfolios is a key determinant of the functioning and resilience of the NBFI ecosystem. These dislocations become more likely in the case of large imbalances between liquidity supply and demand. NBFI resilience therefore depends on the behaviour of different types of entities in the NBFI ecosystem as well as on the infrastructure and activities that connect those entities together, and with other parts of the financial system.

The main focus of work to date has been on assessing and addressing vulnerabilities in specific areas that may have contributed to the build-up of liquidity imbalances and their amplification. This includes:

The NBFI progress report describes the key findings to date and next steps in all of these areas.

Building on these findings, the second part of the FSB’s work programme aims to develop a systemic approach to NBFI. It involves enhancing the understanding of systemic risks in NBFI to strengthen their ongoing monitoring; and, where appropriate, developing policies to address such risks. The focus of policy work is to ensure that the current policy toolkit is adequate and effective from a system-wide perspective, drawing on the lessons from the March 2020 market turmoil.

The table below summarises the work programme on NBFI for 2022 and beyond.

NBFI Progress Report Table 1

Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management

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Recommendation 1: Asset Manager Practices, Policies, Procedures and Disclosure. Securities regulators and/or policymakers, as applicable, should consider setting regulatory and supervisory expectations for asset managers in respect of the: (a) development and implementation of practices, policies and procedures relating to material sustainability-related risks and opportunities; and (b) related disclosure.

Recommendation 2: Product Disclosure. Securities regulators and/or policymakers, as applicable, should consider clarifying and/or expanding on existing regulatory requirements or guidance or, if necessary, creating new regulatory requirements or guidance, to improve product-level disclosure in order to help investors better understand: (a) sustainability-related products; and (b) material sustainability-related risks for all products.

Recommendation 3: Supervision and Enforcement. Securities regulators and/or policymakers, as applicable, should have supervisory tools to monitor and assess whether asset managers and sustainability-related products are in compliance with regulatory requirements and enforcement tools to address any breaches of such requirements.

Recommendation 4: Terminology. Securities regulators and/or policymakers, as applicable, should consider encouraging industry participants to develop common sustainable finance related terms and definitions, including relating to ESG approaches, to ensure consistency throughout the global asset management industry.

Recommendation 5: Financial and Investor Education. Securities regulators and/or policymakers, as applicable, should consider promoting financial and investor education initiatives relating to sustainability, or, where applicable, enhance existing sustainability related initiatives.