China’s central bank set out the main principles of its fintech ethics governance system in its Fintech Development Plan (2022-2025).

China’s central bank is ramping up efforts to set up an ethics governance system for the fintech sector by the end of the year which will also tighten supervision and tackle risks, suggesting regulation of the industry is far from over.

As algorithms and new technologies including blockchain, AI and big data become increasingly embedded in financial products and services, China’s authorities want to make sure financial institutions and technology companies involved in financial services are operating in an ethical way. They also want to put a regulatory framework in place to hold businesses accountable and punish wrongdoing.

The People’s Bank of China (PBOC) has taken the lead in establishing a fintech ethics governance system that will not only contain rules but also a self-governance framework for companies to follow for both existing and new financial products and services such as online payments, insurance and banking. It will cover issues including the recognition, assessment and navigation of risks stemming from unethical practices.

Setting up the system was one of the first tasks set out in the PBOC’s four-year fintech roadmap published in early January. Its importance was underlined at a March meeting of the central bank’s fintech committee, where it was listed as one of the main policy priorities this year.

The system “will reinforce early warning, monitoring, analysis and agile governance regarding the risks associated with the ethics of technology, guiding relevant institutions to fulfill their responsibilities for ethical governance … to effectively protect the legitimate rights and interests of consumers and serve the real economy,” the PBOC said in a statement on March 23 following the meeting.

The PBOC has been pushing ahead with designing the governance system since mid-April, sources with knowledge of the matter told Caixin. Since the second half of last year, a special taskforce comprising tech experts from a number of major financial institutions and fintech firms has been working to formulate of a set of guidelines (金融领域科技伦理指引) that will deal with problems including data misuse and disorderly competition.

While there are several laws that touch on issues in the technology field, including the Personal Information Protection Law, the Cybersecurity Law, the Data Security Law and the Anti-Monopoly Law, they don’t fully address the matter of ethics governance when it comes to new technologies.

Ethics isn’t the only topic being addressed by fintech regulation. In March 2021, the PBOC published the “Evaluation specification of artificial intelligence algorithm in financial application” (人工智能算法金融应用评价规范), which aims to provide a systematic framework for financial institutions to assess the use of smart algorithms in their products based on security, accuracy and performance so that they can better manage the new technology and prevent risks.

“In the past, we have always placed an emphasis on the law and the legal system to govern market order,” Zhu Hongren, a former chief engineer of the Ministry of Industry and Information Technology, said at a forum on April 14. “But when it comes to the digital economy, where the development of technology is always faster than the formulation of laws, there needs to be a set of standards, a framework, a principle [to govern this area]. And that’s fintech ethics.”

The issue of fintech ethics is one that regulators around the world, not just in China, are grappling with.

“In today’s digital environment, adherence to the law is not enough; we have to consider the ethical dimension of data processing,” the European Data Protection Supervisor, the European Union’s independent data protection authority, said in an opinion on digital ethics published in September 2015.

The PBOC set out the main principles of its fintech ethics governance system in its Fintech Development Plan (2022-2025), noting that it should be built based on innovation promotion and risk prevention, and that industry players should adhere to both institutional rules and self-governance measures.

All relevant parties in the financial sector need to play a role in digital ethics, the plan says. Financial institutions should take responsibility for establishing internal fintech ethics committees as well as introducing work processes such as ethics reviews and information disclosure in order to prevent abuse of technology. Industry associations should create and adopt self-regulatory pacts and have businesses commit to self-regulation to keep their practices in check. As for employees in the fintech sector, they are encouraged to take the initiative to learn about ethical digital practices and follow them in their work.

Tackling unethical practices

The government understands the potential of data to increase productivity and spur economic growth, and in 2020 the Communist Party’s Central Committee and the State Council included it as a factor of production. Data also features prominently in the five-year plan for developing the digital economy released by the government in January. But policymakers also recognize they need to improve regulation to stamp out risk and malfeasance, and ensure that laws on data security and privacy are obeyed.

Given the size of the fintech sector, the need to tackle ethical problems is growing more pressing.

Fintech business carried out by China’s financial institutions reached 7.5 trillion yuan ($1.1 trillion) in 2020 and the country had a record 23 fintech unicorns that accounted for 41% of the total number globally, according to a report written by Xiao Gang, a former chairman of the China Securities Regulatory Commission, and 13 researchers.

The report, which was presented at the April 14 forum, pointed out a plethora of unethical and sketchy practices evident in the country’s fintech sector and put forward recommendations for how the governance system could tackle them.

With consumer protection placed at the heart of the PBOC’s proposed fintech ethics governance system, the framework will aim to root out unruly practices carried out by some firms for business gains in four main areas, Li Wei, director at the PBOC’s technology department, wrote in an article in Modern Bankers magazine in February.

First, it will take aim at data breaches, including the practice of illegally obtaining users’ personal information without consent, leaking and selling of users’ personal information to third parties, and using data to target specific users to entice them to buy.

Second, it will clamp down on algorithm abuse and bias. Third, it will tackle the misuse of technology in enabling disorderly and unfair competition. Fourth, it will aim to address the country’s current digital divide, which it defines as unbalanced financial development among different demographics and regions that has led to segmentation and an excessive focus on developing products for digitally literate groups while ignoring others such as the elderly, people with disabilities, and ethnic minorities.

Last May, the online lending apps developed by the finance arms of ride-hailing giant Didi Global Inc., Ping An Insurance (Group) Co. of China Ltd. and China Merchants Bank Co. Ltd. were among a list of 48 apps named by the country’s internet regulator for illegal activities such as obtaining data without users’ consent, or collecting more information than required to operate, and demanding excessive permissions.

Citing research and best practice implemented by a number of developed countries including the U.S., the U.K., Singapore and South Korea, Xiao’s report noted that China’s ethics governance in the fintech sector should adhere to principles including openness, fairness, risk control, agility and flexibility. Ethics should be embedded in every key aspect of an institution’s operations, it said.

The report proposed a range of measures to build the governance system, including setting up industry groups and committees, publishing clear and practical regulations, and formulating an assessment and review mechanism to ensure proper implementation.

“In practice, financial institutions and fintech companies should carry out self-assessment, and incorporate ethical norms into their risk management and internal control processes,” the report said. New products and services should not only be subject to compliance reviews and technical security reviews, but also ethics reviews, it said.

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Source:  Caixin Global