There is no doubt that FinTech operations in Nigeria have continued to gain enormous grounds.  In order to keep up with the pace of developments in that space, regulators such as SEC have continued to update their rules and regulations in order to effectively regulate the FinTech space without compromising market integrity and investor confidence.

The RI programme is to be launched in the third quarter of 2021 and will only admit identified FinTech business models for a one-year period.

What is the Regulatory Incubator?

There has been growing concern among FinTech operators in Nigeria regarding new FinTech business models whose kinds of operations, though may have semblance of business to be regulated by SEC are not specifically designated to be regulated by SEC. As a result, this SEC Regulatory Incubation will allow these FinTech companies operate under some prescribed basic but limited provisions for a specified period.

This practice will enable SEC to have a first-hand supervision of these new models of providing Capital Market services before it becomes fully established either by proposing amendment to existing Rules or by making new ones.

These requirements apply to Fintech seeking registration and whose function or operations have been reviewed and deemed requiring an amendment to existing Rules or the creation of completely new ones.

Who will qualify for Admission into the RI Programme?

The programme applies to all FinTech businesses who consider that there is no specific regulation governing their business models or who require clarity on the appropriate regulatory regime that would apply to their businesses.

It also applies to all new business models and processes that require regulatory authorisation from SEC to continue carrying out full or ancillary technology-driven Capital Market activities. For instance, this will be a good opportunity for any digital asset exchanger.

There are certain pre-qualification requirements which applicants must meet to qualify for admission. These pre-qualification requirements include:

1. Applicant shall be using innovative technology to offer a new type of product or service, or applying innovative FinTech to an existing product or service;
2. Applicant shall be ready to take-off with live customers and operate within the purview of the SEC Regulatory Framework;
3. The product or service shall be one that addresses a problem (compliance or supervision) or brings potential benefits to consumers or industry; and
4. Applicant shall complete the FinTech Assessment Form and discuss the proposal with the Commission at an early stage.

Participation will involve two stages. The Initial Assessment Phase and the Regulatory Incubation Phase.

The above category of FinTech business can participate by submitting the relevant assessment forms provided by SEC for SEC’s assessment.

Depending on SEC’s assessment of each form together with meeting every other pre-qualification requirement, SEC will communicate with the FinTech companies selected for the programme ahead of each take-off-date.

Regulatory Incubation Operations Requirement

There are guidelines provided for certain operation requirements which must be met by the FinTech operator for regulatory incubation operations. These include that the FinTech operator shall:

1. have an office in Nigeria;
2. undertake to comply with AML/CFT requirements;
3. be deemed fit and possess relevant skills in financial services and/or technology; and
4. undertake to provide full disclosure to the Commission on the business through an incubation implementation plan etc.

Restrictions and Conditions

Please note that there are conditions attached for participating in the RI. All participating FinTech operators must among other conditions and restrictions comply with the following

1. must not conduct any other investment business except as presented to the Commission;
2. shall be under regulatory incubation only for a maximum period of one-year after which they shall apply for registration if found eligible or discontinue the activity.
3. shall have the capacity to on-board a maximum of 100 clients who shall be fully informed of the service or product prior to onboarding. Subject to the Commission’s appraisal and approval, the firm may on-board additional clients if the need arises. Firms that are already in operation shall maintain their existing clients and cease on-boarding new ones.

A FinTech operator participating in the RI can be terminated upon failure to abide by any of the above conditions and restrictions in addition to any other grounds which SEC deems fit.

As has been mentioned above, an interested FinTech operator shall first and foremost prepare and file an assessment form with SEC together with an application form and a processing fee of ₦200,000.00.

CONCLUSION

The introduction of this RI presents a good opportunity for FinTech operators who need clarity on whether or not SEC can regulate their innovative business model. This helps in answering their questions of whether they would be required to obtain any relevant licences from SEC in order to comply with regulatory requirements.

FinTech operators who fall under this category will first and foremost be pre-qualified before they are admitted for the RI. These FinTech operators are advised to fill SEC’s assessment forms together with an application fee and forms and submit to SEC for their initial assessment.

Please note that the content of this Article is for general guidance on the Subject Matter. It is NOT and is not to be taken as giving legal advice.

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Participants in non-bank acquiring

1. Non-Bank Acquirer
2. Settlement Bank/Sponsor Bank
3. Merchant’s Deposit Money Bank
4. Card Schemes
5. Other Payment Schemes
6. Nigeria Central Switch (NCS).

Who is a Non-Bank Acquirer?

A Non-Bank Acquirer is a CBN licensed switching and processing Company or any other Company as may be approved by the CBN, other than Acquiring Banks.

Requirements for Approval as a Non-Bank Acquirer

An intending Non-Bank Acquirer must be a CBN-licensed Switching and Processing Company or any other company as approved by the CBN and is to seek for approval from the CBN with the following documents:

1. Evidence of engagement with a card scheme
2. Due Diligence and Merchant Onboarding Process
3. Merchant Risk Monitoring Framework
4. Sponsorship letter from one (1) Settlement Bank
5. Draft Merchant Agreements
6. Details of its settlement arrangements
7. Service Level Agreement (SLA) with Settlement Bank

Business Continuity Plan and any other document(s) that may be required by the CBN.

The role & responsibilities of Non-Bank Acquirer are as follows:

1. Process and settle transactions on behalf of merchants in Nigeria.
2. Put in place, risk controls measure to monitor merchant activity as well as a fraud monitoring/behavioral management solution, such as the KYC/AML policy.
3. Control merchant approvals and Provide Payment Scheme acceptance privileges;
4. Stipulate its responsibilities to the merchant, for the security and settlement of transaction amounts to merchant accounts.
5. Ensure that Merchants’ accounts are credited in respect of the acquired transactions, as agreed in executed SLAs
6. Have controls in place, related to establishing and changing merchants’ bank accounts where settlement funds are deposited.
7. Execute Agreement with each payment scheme whose transactions it wishes to acquire.

Termination of Non-Bank Acquirer’s Approval

The CBN may terminate a Non-Bank Acquirer’s Approval if:

1. It fails to meet the conditions for renewal of operating license, as a switching and processing company in Nigeria;
2. CBN revokes any existing license/approval;
3. An agreement with or approval of payment scheme(s) is terminated;
4. It is unable to maintain relationship with at least two (2) payment schemes;
5. There is an operational failure that leads to significant losses/fraud.

Non-Bank Acquirers are prohibited from havingdirect access to or from holding Merchants’ Funds for any other reason whatsoever.

Settlement/Sponsor Bank

An application for approval is to be sponsored by at least, one (1) acquiring bank (Settlement/Sponsor bank) where the settlement will be domiciled.

The role of the Settlement bank is to:

1. Generate financial/transaction data; and
2. Compute settlement position in the acquisition process.

The roles of other Participants in a Non-Bank Acquiring Process, that is, the Settlement Bank, Merchant’s Deposit Money Bank, Payment Schemes and NCS are and, may from time to time be provided in the Guidelines for the Operations of Electronic Payment Channels in Nigeria as well as other relevant regulations.

Conclusion

The Framework for Non-Bank Acquiring in Nigeria is a welcome development. The Framework seems to specify requirements for the Non-Bank Acquirer and makes some provisions for the role of the Settlement Banks. It points to the Guidelines for the Operations of Electronic Payment Channels in Nigeria for more direction on the roles of other participants.

The Non-bank financial institutions including FinTech companies that fall into this category will be guided by this regulation, the Guidelines for the Operations of Electronic Payment Channels in Nigeria as well as any other legislation that may be enacted from time to time. The Framework also emphases the importance of risk management and the need for Non-bank acquirers to have a KYC/AML policy.

Please note that the content of this Article is for general guidance on the Subject Matter. It is NOT and is not to be taken as giving legal advice.

For further information or to see our other service offerings, please visit www.goldsmithsllp.com or contact;

The post A Summary of the Central Bank of Nigeria (CBN) Regulatory Framework for Non-Bank Acquiring in Nigeria first appeared on Goldsmiths Solicitors.

What is a Fintech Company?

FinTech has been defined as an economic industry composed of companies that use technology to make financial services more efficient^[i].

Thus, a FinTech Company is one that provides financial services such as banking services, money transfer, online payment services, etc. digitally as opposed to the traditional over-the-counter or in-person financial services. Examples operating in Nigeria include Interswitch, Flutterwave, Remita, Opay, Piggyvest, etc.

Regulatory Bodies for Fintech Companies in Nigeria.

The activities of FinTech Companies are regulated by various agencies in Nigeria. These are mostly government agencies and define the scope, administrative and operational requirements for FinTech companies.

The Corporate Affairs Commission (CAC):

This is usually the first regulatory point of contact for startup FinTech companies. They are responsible for incorporation of Companies^[ii] and without due approval by the CAC, no FinTech Company can be validly operational in Nigeria.

The Central Bank of Nigeria (CBN):

The CBN^[iii] is the main regulatory body that has primary responsibility for granting licenses to any individual or entity that desires to carry on banking business^[iv] and the business of other Financial Institutions^[v] including FinTech Companies in Nigeria.

Any FinTech Company which, before the enactment Banks and Other Financial Institutions Act (BOFIA), 2020 (the Act that establishes the CBN) carries on the business of other Financial Institutions without being duly licensed by the CBN is required to obtain license in accordance with the Act.^[vi]

The Securities and Exchange Commission (SEC):

SEC develops and regulates the Nigerian Capital Market with the view of protecting investors and enhancing efficiency. FinTech Companies that provide services in the Nigerian Capital Market such as E-Dividends, Direct Cash Settlement and Dematerialization, registration of securities, Capital Market surveillance, etc. will be required to register with SEC. Every Collective Investment Scheme is to be registered with SEC.^[vii] Fintech Companies that are desirous of raising funds through the Capital Market are also required to register with SEC.^[viii]

Other regulatory bodies include: The Nigerian Communication Commission (NCC), the Nigeria Deposit Insurance Corporation (NDIC), National Information Technology Development Agency (NITDA), the Federal Competition and Consumer Protection Commission (FCCPC). 

The Regulatory Requirements for Fintech Companies in Nigeria:

1. INCORPORATION

This is a mandatory requirement and it is the first leg in the wheel of doing business in the FINTECH space in Nigeria. Before any FinTech Company can transact business in Nigeria, it must be registered or incorporated with the CAC except the company exempt by the Commission.

In incorporating a FinTech Company, essential requirements such as the minimum issued share capital, shareholding, directorship, etc. must be considered by the promoters of the FinTech Company in order to ensure compliance with existing laws and regulations.

2. LICENSING

FinTech Companies must be duly licensed by the licensing authorities before providing financial services. The CBN is charged with this mandate except as exempted under the BOFIA 2020.^[ix]

Other requisite license(s) may be obtained from SEC^[x], NDIC and NCC depending on the nature of services to be rendered. FinTech Companies may also be required to obtain licenses/approvals from NCC, or other agencies authorised to grant licenses by virtue of any existing laws or regulations.

3. DATA PROTECTION

FinTech Companies are required to ensure that the data provided by their users and stakeholders are protected except when exempted by law. The 1999 Constitution of the Federal Republic of Nigeria (as amended), CBN Cyber-based Security Framework and Guidelines for Deposit Banks and Payment Service Providers 2018, Cybercrime (Prohibition, Prevention, Etc.) Act 2015, Nigerian Data Protection Regulation 2019, Nigerian Communications Commission (NCC) Draft Consumer Code of Practice Regulations 2018 are some of the data laws which FinTech Companies are required to comply with in Nigeria.

4. KYC/AML POLICY

FinTech companies are also required to maintain and be guided by a robust Know-Your-Customer/Anti-Money Laundering Policies. This is to mitigate against financial fraud including financing terrorist activities.

The KYC/AML Policy of every FinTech Company must be in line with requirements provided by existing laws, regulations and international best practices. Some of these laws and regulations include; Money Laundering (Prohibition) Act, 2011 (as amended), Money Laundering (Prohibition) Act 2011, Advanced Fee Fraud and other Fraud Related Act 2006.

Conclusion/Recommendation

There is no doubt that the FinTech space in Nigeria is fast evolving and has attracted tremendous interests both locally and internationally. The importance of making sure you comply with the laws and regulations which govern FinTech Companies in Nigeria cannot therefore be overemphasized. In order for you to legally operate in Nigeria as a FinTech business you must ensure that the company is duly incorporated, have all requisite licenses and approvals and are constantly abreast with what can only be described as a fast-paced regulatory landscape.

Please note that the content of this Article is for general guidance on the Subject Matter. It is NOT and is not to be taken as giving legal advice.

[i] Finextra (2016) ”What is FinTech and Where Does it Live” Available at URL: https://www.finextra.com/blogposting/12890/what-is-fintech-and-where-does-it-live Accessed 24th May, 2021.

[ii] Section 8 Companies and Allied Matters Act, 2020.

[iii] Established under Section 1 of the provisions of the Banks and Other Financial Institutions Act (BOFIA), 2020.

[iv] Section 2 and 131 of the Banks and Other Financial institutions Act, 2020

[v] Section 57 and 131, Ibid

[vi] Section 57 (3), Ibid

[vii] Section 54 and 153 of the Investment and Securities Act, 2007

^[viii] Global Legal Insights (2020) “Fintech 2020|Nigeria” Available at URL: https://www.globallegalinsights.com/practice-areas/fintech-laws-and-regulations/nigeria Accessed 24th May, 2021.

[ix] Section 57 BOFIA 2020

[x] Ibid

The post Before You Set Up That Fintech Company: Regulatory Requirements to Be Aware of in Nigeria first appeared on Goldsmiths Solicitors.