Fintech 2020

Last Updated March 02, 2020

Nigeria

Law and Practice

Authors



Banwo & Ighodalo is a leading full-service Nigerian law firm with capacity to offer legal services across several West African countries. The firm is structured as a partnership, currently comprising 12 partners and over 90 lawyers. The FinTech practice is well positioned to offer clients the benefit of its extensive technology experience, combined with regulatory and financial services knowledge. It regularly advises technology companies, start-ups and investors looking to utilise technology innovations in the complex and rapidly changing legal and regulatory landscape. The areas of work include data privacy protection, e-commerce and internet services, financial services regulation, mergers and acquisitions, peer-to-peer debt and equity financing, and payment services. It also leverages on strong relationships with regulators, banks, insurers, funds and infrastructure service providers to offer incisive, informed and innovative advice across the entire fintech value chain. Some of the firm's clients include Mastercard, Interswitch, WorldRemit, AfriQuest, Okapi and Pingexpress. The authors wish to acknowledge the contribution of the following persons in the preparation of this article: Ifeoluwa Ogunbufunmi, Damilola Wright, Seth Azubuike, Daniel Jayeoba, Imade Iyamu, Tosin Oyebanjo, and Destiny Ogedegbe.

The fintech ecosystem in Nigeria is largely comprised of businesses focused on mobile payments, mobile lending and personal finance, including wealthtech. In the past 12 months, Nigeria has continued to bolster its reputation as one of the leading African markets leveraging technology to democratise financial services. According to the 2019 Africa Tech Venture Capital Report, venture capital funding raised by African tech start-ups in 2019 stood at approximately USD2.02 billion compared to approximately USD1.163 billion in 2018. 37% of this 2019 venture capital investment, amounting to about USD747 million, was invested in Nigeria – 62% of this sum was invested in the fintech industry. In the mobile payments sub-sector, close to USD200 million was invested in companies such as Opay and Palmpay.

The transition of hitherto payments platforms into fully operational digital banks has also been observed. Kuda is a case in point – having obtained a microfinance banking licence and entered into partnerships with traditional banks, Kuda is now able to offer usual banking services such as cash deposits, withdrawals and transfers, as well as grant loans.

The emergence of payment service banks (PSBs) also indicates a trend of increased collaboration between financial services companies and technology, media and telecommunications companies. The Guidelines for Licensing and Regulation of PSBs (“PSB Guidelines”) were issued by the Central Bank of Nigeria (CBN) in 2018 and allow telecommunications companies, acting through subsidiaries, to operate as PSBs. In 2019, subsidiaries of leading telecommunications companies – Globacom (Money Master PSB) and 9mobile (9PSB) – were granted approvals in principle by the CBN to operate PSBs, whilst MTN Nigeria, the largest telecommunications company in the country, is currently awaiting approval for its PSB licence. It is thus expected that these PSBs would be fully operational in 2020.

The CBN recently issued the Nigerian Payment Systems Risk and Information Security Management Framework (the “Framework”). The Framework introduces principles and compliance measures that must be adopted by stakeholders in the Nigerian payment system to mitigate risk factors that negatively impact the operations and effectiveness of the Nigerian payment system framework. The risk factors identified in the Framework include systemic risk, settlement risk, information security risk and liquidity risk. The implementation of this Framework will increase efficiency in the operations of stakeholders in the Nigerian payments system.

Further, the fintech market over the past 12 months has experienced an increase in regulatory awareness and commitment by regulators such as the CBN and Securities and Exchange Commission (SEC) to encourage stakeholders whose products and services are not covered under any existing licensing framework. In this regard, the CBN and SEC have set up regulatory sandboxes – a controlled environment that offers a "safe space" for stakeholders to test innovative products, services and business models in a live environment without immediately satisfying all the necessary regulatory requirements.

Issues that may continue to impact the Nigerian fintech market in the next 12 months include:

  • lingering presence of a large unbanked population;
  • expansion of established foreign fintech companies into the market and increased foreign investment into local fintech companies;
  • investment by traditional banks in technology platforms/solutions to compete with fintechs; and
  • regulatory policies of the industry’s principal regulators. For instance, the CBN has issued an exposure draft on the new licence tiering regime for payment system providers. The exposure draft categorises various licences utilised by payment service providers into units/tiers. Thus, if implemented, a holder of a particular licence unit will be allowed to provide services covered under the licences that have been categorised under the unit/tier of licence acquired. However, stakeholders have frowned at the implementation of the licence tiering framework due to the stringent capitalisation and other requirements imposed by the CBN. If it becomes effective, the licensing requirements will affect the ability of stakeholders to take advantage of the licence tiering framework as most of them may be unable to satisfy the capitalisation requirement.

The most prevalent fintech business models in Nigeria are mobile payments, lending services, crowdfunding, personal finance and wealthtech.

  • Payments – the payments sub-sector of the fintech industry is by far the most active in Nigeria and has received the most interest from investors and regulators alike so far. The number of mobile money transactions increased astronomically from 15.9 million transactions in 2013 to 217.8 million transactions in 2019. Payments services cover business-to-business (B2B) applications such as payment processing providers and solutions for accepting payments, and business-to-consumer applications (B2C), which include services such as mobile wallets and payment applications that enable individuals to pay-on-the-go and make peer-to-peer transfers. This sub-sector comprises both fintech companies and legacy players such as deposit money banks (DMBs).
  • Lending – mobile lending applications have also proliferated in the Nigerian fintech space. The ability to provide quicker loans through a simplified lending process (mostly without collateral) gives this model a competitive advantage over traditional lending but legacy players are also deploying similar solutions.
  • Crowdfunding – due to the cost of raising funds from traditional banks, crowdfunding applications have become attractive platforms for raising finance for ventures/projects in Nigeria. Most agritech companies in Nigeria are funded through crowdfunding.
  • Personal finance – another popular business model for fintechs in Nigeria is to offer a personal savings solution that manages personal bills, accounts and/or credit.
  • Wealthtech – a number of fintechs in Nigeria focus on deploying solutions to improve and democratise investment and wealth management to their customers.

Nigeria operates a three-tier federal system of government with powers shared by the Nigerian Constitution among the federal, state and local governments. The regulation of banking activities falls within the purview of the federal government, thus the operations of most fintech companies are regulated by federal laws. Further, there is no specific regulatory regime focused on fintech companies in Nigeria; rather, they are generally subject to the regime applicable to other companies operating similar businesses/models.

  • (a) Payments – the CBN has various regulations for companies providing payment and remittance services, including the PSB Guidelines, the Guidelines on Operations of Electronic Payment Channels in Nigeria (“Electronic Payments Guidelines”), the Guidelines on International Money Transfer Services in Nigeria (“IMTS Guidelines”), the Guidelines on International Mobile Money Remittance Service in Nigeria (“IMMRS Guidelines”), the Guidelines on Mobile Money Services in Nigeria, the Regulation on Electronic Payments and Collections for Public and Private Sectors in Nigeria, and the CBN Regulatory Framework for the use of Unstructured Supplementary Service Data in Nigeria. Of particular importance are the PSB Guidelines, which require PSBs to leverage technology in providing financial services, specifically to the unbanked population predominantly inhabiting rural areas in Nigeria. While PSBs may maintain savings accounts, accept deposits and invest in government-backed securities, they are not permitted to grant loans or trade in the foreign exchange market.
  • (b) Lending – this sub-sector is principally regulated by the Banks and Other Financial Institutions Act (BOFIA), but is also regulated by various guidelines issued by the CBN from time to time that apply to legacy players and fintechs alike. To hold deposits and engage in lending operations in Nigeria, fintechs require any of the following: a commercial banking licence (national or regional), a merchant banking licence, a specialised banking licence, or a microfinance banking licence (national or state or unit) from the CBN. However, fintech companies that are not focused on holding deposits or providing lending services across the entire country may operate with a moneylender’s licence pursuant to the moneylender laws of the relevant state(s) they operate in. The moneylender’s application regime is less onerous than the BOFIA regime, thus the attraction to fintech companies. Alternatively, a fintech company may procure a finance company licence from the CBN that empowers it to provide consumer and business loans to individuals and micro, small and medium enterprises (MSMEs). Yet another alternative is for a fintech company to partner with entities that hold the relevant lending licences and merely provide the technology platform through which the loans are advanced.
  • (c) Crowdfunding – interest or debt crowdfunding remains the prevalent model of crowdfunding in Nigeria, as opposed to equity crowdfunding. This is largely due to the regulatory slant against equity crowdfunding. Section 22 (5) of the Companies and Allied Matters Act (CAMA) provides that private companies limited by shares (which is the usual structure of companies seeking to raise capital via equity crowdfunding) are prohibited from inviting the public to subscribe for any of its shares or debentures. Section 67 of the Investment and Securities Act (ISA) also provides that it is an offence to invite the general public to provide financing in exchange for shares in the company without authorisation from the SEC.
  • (d) Personal finance – to accept deposits from customers, fintechs are required to obtain any of the banking licences identified in (b) from the CBN. In practice, however, fintech companies in personal finance applications in Nigeria typically operate through partnerships with established DMBs. Fintechs have also begun to acquire microfinance banking licences to deliver their products.
  • (e) Wealthtech – entities engaged in the provision of investment services must register with the SEC as capital market operators. Much like personal finance applications, wealthtech companies have also begun partnering with registered capital market operators in order to provide these services.

In addition to the foregoing, pursuant to the License Framework for Value Added Services (VAS), the Nigerian Communications Commission (NCC) regulates businesses that offer financial services by leveraging on mobile phones or other telecommunications infrastructure. A VAS provider is any organisation that engages in the provision of value added mobile/fixed services, including premium related services, and such provider is required to obtain a licence from the NCC.

Finally, the National Insurance Commission (NAICOM) regulates businesses offering insurance services. Accordingly, where an insurtech company carries on insurance business, it will require a licence from NAICOM.

The compensation models for the industry participants vary depending on the business model.

For payment services, the compensation model is highly regulated in Nigeria. Companies in this sub-sector profit by receiving a percentage of the transaction fees that are typically incurred when making payment transfers. In this regard, the Electronic Payment Guidelines provide that fees and charges for web transactions are to be agreed between service providers and banks. It also provides that the maximum total fee that a merchant shall be charged for web transactions shall be subject to negotiations between the merchant and the acquirer (the bank that maintains the merchant bank’s account), and these negotiations must take into account the provisions of the CBN’s Circular on the Implementation of Interchange Fee (the “Interchange Guidelines”). The Interchange Guidelines regulate the interchange fees paid by the Acquirers to Card Issuers (the financial institution that issues credit/debit cards to customers).

The authors are not aware of any disclosure requirements accompanying these regulations; however, the Electronic Payments Guidelines mandate that Card Issuers must provide cardholders with a detailed list of contractual terms and conditions, prior to the activation of the cards. Such terms shall include applicable fees and charges.

For online lending, the moneylender laws of various states prescribe limitations on the interest on loans that may be imposed by moneylenders.       

In Nigeria, there is generally no difference between the regulation of fintech industry participants and the regulation of legacy financial institutions. Fintechs generally operate within the existing regulatory regime for the financial services industry. Indeed, legacy players are developing products to compete with fintech companies, thereby obscuring the regulatory lines.

In 2019, the Financial Service Innovators Association of Nigeria (FSI) in conjunction with the CBN and the Nigeria Inter-Bank Settlement System (NIBSS) launched a regulatory sandbox to facilitate innovation in digital products by fintechs. Dubbed the "Financial Industry Sandbox", the initiative was designed to allow fintechs to test solutions and products within a controlled environment through the application programming interfaces (APIs) of existing companies.

The SEC has also launched a regulatory sandbox that will serve as a safe space to test innovative products, services, business models and delivery mechanisms relating to the capital market in a live environment. The SEC has also established a Fintech and Innovation Office (FINO) to facilitate its communication with innovators, provide guidance on regulatory requirements and monitor products and processes in the capital markets.

The legislation establishing various regulators usually specifies the jurisdiction limits of such regulators.

The CBN is the apex monetary authority of Nigeria responsible for the regulation of all banks and financial institutions operating in Nigeria. The bulk of fintechs in Nigeria deal in payment/financial services, and in so doing, assume quasi-banking functions, thereby coming within the regulatory purview of the CBN.

The SEC is the primary regulatory body for investments and capital markets transactions in Nigeria, including the regulation of all offers of securities to the public and the registration of securities and collective investment schemes. The jurisdiction of the SEC in the regulation of fintechs can be found in the operation of wealthtech applications and crowdfunding platforms, among others. In the same vein, certain fintechs that offer the option of pooling together capital from individual investors towards investment in certain asset classes (collective investment schemes) must be registered with the SEC.

NAICOM regulates the insurance industry in Nigeria, with its jurisdiction extending to insurtech companies that carry on insurance businesses.

Finally, the National Information Technology Development Agency (NITDA) is the regulatory body responsible for promoting and developing policies and guidelines for information technology in Nigeria. Fintechs in Nigeria are required to ensure compliance with the data privacy and protection rules, as stipulated by the NITDA, especially the requirements of the Nigeria Data Protection Regulations (NDPR).

Generally, the powers given to players in the financial services industry by the regulator(s) through the various licences cannot be transferred, assigned or otherwise outsourced to third parties without the consent of the regulator. However, there are certain exceptions.

For instance, certain financial services can be provided by a third party (agent) to customers on behalf of DMBs or mobile money operators (as vendors) pursuant to the CBN Guidelines for the Regulation of Agent Banking and Agent Banking Relationships in Nigeria. The vendors are required to submit an application for approval to the CBN, stating the extent of agent banking activities and responsibilities of relevant parties as well as the risk management, internal control, operational procedures and any other policy and procedures relevant to the agent banking arrangement. The parties to the agent banking arrangement are also required to enter into service level agreements and agent banking contracts satisfactory to the CBN.

Nigerian laws establishing the various regulatory bodies also empower these bodies to enforce compliance with the regulations and imposition of sanctions for the infringement of these regulations. These sanctions include fines, suspension of licences and, in some instances, the institution of criminal proceedings against the principal officers of the company. For instance, Section 303 of the ISA imposes a penalty on any person that carries on investments and securities business without SEC registration. Section 304 of the ISA further provides that where the SEC in the course of its investigation discovers evidence of possible criminality, it shall pass such information to the appropriate criminal prosecuting authorities.

Similarly, the various guidelines issued by the CBN stipulate sanctions for operators in violation of CBN regulations, including suspension/revocation of operation licence and financial penalties. On its part, the NITDA prescribes that any operator found to be in breach of its regulations on data privacy rights shall be liable to criminal proceedings and in the case of an operator dealing with over 10,000 persons, payment of a fine equal to 2% of the operator’s annual gross revenue for the preceding year or payment of the sum of NGN10,000,000, whichever is greater.

In addition to the primary regulations governing their businesses, fintechs are subject to general laws/regulations with attendant compliance obligations. However, there is generally no difference in the application of these regulations to fintechs compared to legacy players.

The NDPR is the principal privacy law in Nigeria and all companies collecting and processing customers’ data must comply with its provisions. The NDPR mandates operators to maintain security measures for the protection of such data. Further, the Cyber Crime (Prohibition, Prevention) Act requires fintechs to verify the identity of their customers carrying out electronic financial transactions by requiring the customers to present documents bearing their names and other relevant information before the issuance of ATM cards, credit cards, debit cards and other related electronic devices.        

Fintechs are also required to comply with the Money Laundering (Prohibition) Act in addition to the CBN (Anti-Money Laundering and Combating the Financing of Terrorism in Banks and Other Financial Institutions in Nigeria) Regulations 2013 (the “AML Regulations”).

Another major additional regulation is the Federal Competition and Consumer Protection (FCCPC) Act. Its provisions extend to fintechs and prohibit anti-competitive practices, including price fixing and arrangements that are a restraint on competition.

There is no specific regulation for social media and similar tools in the context of fintechs at the moment. However, there are the Guidelines for the Use of Social Media Platforms in Public Institutions (2019) issued by the NITDA to regulate use of social media by government agencies or government-owned establishments. There is also a Protection from Internet Falsehood and Manipulations Bill (“Social Media Bill”) pending before the Nigerian legislature that seeks to prevent falsehoods and manipulations of social media platforms with sanctions for defaulters.

Nonetheless, the provisions of general law/regulations (including criminal laws) around defamation, privacy, intellectual property rights, competition and consumer law continue to apply to the use of social media with corresponding legal implications.

The NIBSS, amongst others, initiates and develops an integrated nationwide network for electronic or paperless payments, funds transfer and settlement of transactions. To fulfil its mandate, the NIBSS sets verification standards that must be complied with by industry participants who seek to consummate transactions on the NIBSS network. For instance, NIBSS introduced the Account Verification Service (AVS) to eliminate the incidence of invalid customer details in electronic funds transfer instructions. With the AVS, individuals as well as financial institutions presenting instruments for payment can verify the validity and correctness of beneficiaries’ bank account details prior to processing the actual payment instruction.

NIBSS is the sole catalyst for interoperability and aggregation in the payments industry. Aggregation involves the interconnectivity of all payment terminals deployed in the system. NIBSS ensures that all terminals used in the e-payment industry and all devices deployed in Nigeria accept all cards issued by banks and other licensed card schemes without discrimination.

In addition, CAMA stipulates that all companies in Nigeria shall prepare financial statements, which shall consist of an auditor’s report certified by an independent auditor. Thus, all fintechs operating in Nigeria must be audited annually by certified independent audit firms.

Generally, it is not permissible for licensed/registered companies offering regulated products to offer unregulated products and services. Regulated entities operating in the financial services industry submit annual returns of their operations/businesses and undergo an annual examination that will expose any unregulated products/services.

In Nigeria, there are no requirements for companies deploying robo-advisory platforms to maintain different business models for different asset classes. Refer to 7.2 Regulation of Different Asset Classes for the different asset classes that exist in Nigeria.

Robo-advisory technology has been sparsely deployed in providing financial advisory services in Nigeria as traditional (human) models continue to be popular. Predominantly, the legacy asset management/stockbroking firms have put automated solutions more to use for first-link interfaces with customers.

Due to its limited deployment in Nigeria, there are currently no best practices in Nigeria relating to execution of customer trades on robo-advisory platforms. However, the Nigerian Stock Exchange (NSE) issued the Rules on Order Handling and Best Execution in July 2018 (“NSE Order Handling Rules”), which stockbrokers/dealing members (whether they utilise technology solutions in their service offerings or not) are required to comply with in the execution of customer trades. Refer to 7.5 Order Handling Rules, 7.7 Issues Relating to Best Execution of Customer Trades and 7.8 Rules of Payment for Order Flow.

There are generally no differences in the regulation of loans based on the nature of the borrower (individuals, small business or large corporates) subject to applicable prudential guidelines. However, online lenders generally operate under limited licensing frameworks (due to relaxed application and compliance processes), with restrictions on the value of loans that may be granted to individual businesses. For instance, a finance company licence allows grant of consumer loans to individuals and MSMEs. Thus, online lending typically targets retail and small and medium-scale enterprise (SME) loans, albeit that traditional banks are not prevented from granting loans to similar entities.

To improve underwriting processes, online lenders are using deep-learning algorithms to process vast amounts of data and more accurately quantify the risk of default. Advanced analytics models can draw on customer data from both external and internal sources and provide input for improved underwriting. Some lenders partner with telecommunications operators to gather additional data by using customers’ airtime purchase and consumption patterns. The introduction of the Credit Reporting Act in 2017, which facilitates credit reporting and gathering, appears to have also strengthened the underwriting process since the loans availed through these platforms are mostly provided without collateral. This has allowed the banks to underwrite loans for the mass markets with credit loss rates well below the industry average.

However, there are no specific regulations that provide for a particular underwriting process for online lenders in Nigeria. Thus, general requirements applicable to traditional players will apply to online lenders.

There is no particular source of funds peculiar to fintech companies for online lending purposes in Nigeria. However, the most popular is lender-raised equity, whilst other sources of funds include loans (shareholder or third-party), deposit-taking activities, debt capital markets instruments, peer-to-peer bilateral funding and securitisations. Compared to peer-to-peer lending, private placement transactions and loan arrangements, there are legal issues around the ability of online lenders to raise equity from members of the public due to restrictions in CAMA and ISA.

Loan syndications are quite popular in the Nigerian financial market but mostly with traditional banking institutions, as against online lenders, since the value of loans typically disbursed through online lending platforms is generally small.

Typically, where the value of a loan to be procured by a borrower is huge, a financial institution will pool together a syndicate of other banks to provide the loan on similar terms. A security trustee is appointed to hold collateral provided by the borrower for the benefit of the syndicate of lenders. A facility agent is also appointed to collect interests and repayments from the borrower and distribute to the syndicate as well as monitor the borrower’s financial covenants and administer waivers and amendments to the loan documentation. Syndicated loans are also subject to prudential guidelines prescribed by the CBN from time to time.

It is not mandatory for payment processors in Nigeria to use existing payment rails or gateways to deliver their services to merchants. Payment processors may build or invest in their own payment gateway infrastructure with the attendant obligation to obtain a Payments Services Solution Providers (PSSP) licence from the CBN. However, due to the generally lengthy process for procuring licences from the CBN, payment processors tend to leverage on existing payment gateways licence-holders pending the procurement of their own licences.

The CBN regulates cross-border payments and remittances, and issues licences to organisations seeking to provide such services in Nigeria. The most relevant regulations in this regard are the IMTS Guidelines and the IMMRS Guidelines.

Specifically, the IMTS Guidelines provide minimum standards and requirements for international money transfer operations, specify delivery channels for such money transfer operations and provide guidelines for the implementation of processes and flows of international money transfer services. Paragraph 2.1 of the IMTS Guidelines provides that no person or institution shall provide international money transfer services unless such person/institution has been duly licensed by the CBN as an International Money Transfer Operator. In terms of Paragraph 2.6(a) of the IMTS Guidelines, DMBs are prohibited from operating as international money transfer service operators, but may act as agents for licensed entities.

The IMMRS Guidelines were issued to complement the IMTS Guidelines by facilitating foreign exchange transactions through mobile applications.

Fund administrators are regulated under Nigerian law by the ISA and the SEC’s Rules and Regulations (“SEC Rules”). The SEC Rules set forth that fund managers may engage in investment advisory services, selection of securities for the fund/portfolio, publication of financial market periodicals, management of funds and portfolios on behalf of investors, or any ancillary activities. Thus, where an entity is looking to engage in these services, registration with the SEC as a portfolio/fund manager is mandatory.

To assure investor protection, the SEC Rules contain robust provisions around information to be placed in any prospectus, trust deed or contract with fund administrators (including maximum incentive fees chargeable by a fund manager, governance framework and approved investment instruments for deposited funds). Investors or fund advisers may also negotiate additional provisions in the contracts with fund administrators to ensure they administer their functions with due care and skill in line with investors’ commercial objectives.

Fund managers have an affirmative duty to serve as “gatekeepers” in connection with suspicious criminal activity. In connection with anti-money laundering and combating financial terrorism, the SEC Rules require all capital market operators, including fund managers, to have a written policy that would guide and enable its staff to monitor, recognise and respond appropriately to suspicious transactions. In addition, the SEC Rules require all capital market operators, including fund managers, to report suspicious transactions to the Nigerian Financial Intelligence Unit (NFIU) within 72 hours.

The applicable and permissible platforms for trading securities in Nigeria are dependent on the type of security intended to be listed. For debt securities, the current trading platforms permissible are the Nigerian Stock Exchange (NSE) and the FMDQ Securities Exchange PLC (FMDQ). Equity securities can be traded on the NASD OTC PLC (NASD) and the NSE, whilst commodities can be traded on the AFEX Commodities Exchange and Abuja Securities and Commodities Exchange.

The NSE also provides the Alternative Securities Market (ASEM) and Growth Board, which are trading platforms available to small and mid-sized fast-growth companies to raise critical long-term capital at relatively low cost to realise their business potential.

The SEC regulates the operation of exchanges, trade points and other self-regulatory organisations in Nigeria. The ISA particularly provides that no securities exchange or capital trade point shall commence operations unless it is registered with the SEC. In addition, there are specific rules and regulations issued by each exchange and trading platform that will apply to any company or securities seeking to be listed on that exchange.

Currently, the primary regulation for listing on the NSE is the Nigerian Stock Exchange Rulebook 2015. The regulations for listing securities on the FMDQ include the FMDQ Bond Listing and Quotation Rules September 2014 and FMDQ Commercial Paper Registration and Quotation Rules August 2019, whilst the regulation for listing on the NASD is the NASD OTC Market Rules. These rules are, however, amended from time to time.

Different asset classes have different regulatory regimes. The asset classes that exist in Nigeria include equity, debt, commodities, futures, derivatives, fixed income and collective investment schemes/mutual funds. The rules and regulations applicable to each asset class extend to securities listing, transaction monitoring, and compliance by members with the ISA, SEC Rules and the various rules of the applicable exchanges and trade points. For example, the ISA empowers the SEC to regulate the derivatives market and in December 2019, the SEC approved and published rules regulating derivatives trading in Nigeria, which apply to exchange-traded derivatives and OTC derivatives where specifically mentioned.

Cryptocurrency exchanges are not specifically regulated in Nigeria. On 12 January 2017, the CBN issued a circular to banks and other financial institutions (OFIs) on virtual currency operations in Nigeria (the “Circular”) providing that virtual currencies are not legal tenders in Nigeria and any bank or institution that transacts in such business does so at its own risk. The Circular further states that pending substantive regulation or decision by the CBN, banks and OFIs are required to take the following actions: (i) ensure that they do not use, hold, trade or transact in any way in virtual currencies; (ii) ensure that existing customers that are virtual currency exchangers have effective AML/CFT controls that enable them to comply with customer identification, verification and transaction monitoring requirements; (iii) where banks or other financial institutions are not satisfied with the controls put in place by the virtual currency exchangers/customers, the relationship should be discontinued immediately; and (iv) any suspicious transactions by virtual currency customers should immediately be reported to the NFIU.

Although the SEC had previously warned the public that none of the persons, companies or entities promoting cryptocurrencies has been recognised or authorised by it or by other regulatory agencies in Nigeria, the SEC set up a Blockchain and Virtual Financial Assets Working Group for the Nigerian Capital Market in 2019. SEC’s Special Committee on a Roadmap for Adoption of Fintech in the Nigerian Capital Market (“SEC Fintech Committee”) also presented a report to the SEC last year with recommendations including the regulation of blockchain and cryptocurrency in Nigeria.

The applicable listing standards for every proposed security or company listing/trade are dependent on the exchange or platform on which a company or security seeks to be listed.

Companies seeking to be listed on the NSE must comply with the NSE’s listing rules in the NSE Rulebook as well as the relevant provisions of CAMA, the ISA and the SEC Rules. A company may be listed on the Main Board, Premium Board, the ASEM or the Growth Board of the NSE. In addition, the main board of the NSE has three listing standards that are applicable to companies seeking to list on the main board. The NSE Rulebook also stipulates other listing requirements for companies seeking to be listed on the Premium Board, Growth Board and the ASEM.

Furthermore, the FMDQ Bond Listing and Quotation Rules September 2014 provides for the listing standards for the quotation of securities for companies, mutual funds, ETFs, mortgage backed and asset-backed securities on the FMDQ, whilst the NASD OTC Market Rules sets out the requirements for a company seeking to be listed on the NASD OTC.

There are no general order handling rules applicable to dealers in the Nigerian capital markets regulatory sphere as each exchange is expected to issue its order handling rules.

For example, the NSE Order Handling Rules sets out rules on order handling and execution for dealing members. It provides that when executing a client’s order, a dealing member shall take into account the following criteria for determining the relative importance of the execution factors: (i) the characteristics of the client, including the categorisation of the client as retail or institutional; (ii) the characteristics of the client order; and (iii) the characteristics of securities that are the subject of that order, including expected return, risk, liquidity and volatility.

When carrying out client orders, each dealing member must ensure that the orders executed on behalf of clients are promptly and accurately recorded and allocated, and inform its client about any material difficulty relevant to the proper execution of orders promptly upon becoming aware of the difficulty.

The FMDQ General Market Rules also provides that all dealing members are required to employ only FMDQ-authorised systems for pre-trade, trade and post-trade activities on the FMDQ platform. It further stipulates that dealing members shall comply with the settlement standards guiding trades executed with other dealing members, associate members and clients.

Peer-to-peer trading platforms are not regulated under Nigerian law. Therefore, the regulated over-the-counter trade points and recognised exchanges are still the main platforms.

An issue that relates to the best execution of customer trades is that under the NSE Order Handling Rules, every dealing member must establish and implement an order execution policy to allow it to obtain, for its client order, the best possible result. Pursuant to this best execution obligation, investment companies are obliged to execute customer orders in a way that would provide the best results for the customers, considering customer preferences such as price, cost, speed, clearing, settlement, custody and counterparty.

There are currently no rules or regulations expressly permiting or prohibiting payment for order flow. However, the NSE Order Handling Rules provides that each dealing member shall execute its client’s specific instructions and take all reasonable steps to obtain the best possible result for a client whilst executing an order or a specific aspect of an order. In addition, the NSE rules on the registration of market makers provides that every applicant who intends to be a market maker must ensure that they have in place a proper supervisory programme and a system to ensure a proper management of conflict of interest.

Furthermore, the NASD Market Maker Rules provides that market makers must enter and maintain a two-sided trading interest in line with the rules to be displayed on the NASD OTC’s market quotation board through the course of each trading day. This provision ultimately restricts payment for order flow as dealers and market makers will be unable to reroute orders because they must at all times maintain a two-sided trading interest that must be displayed on the NASD quotation board.

There are currently no regulations in relation to high-frequency and algorithmic trading in Nigeria. The NSE, however, has three software applications for trading, which are FIX, FAST and X Gen; the introduction of which have improved mobile trading technologies in the Nigerian capital market and some dealers have taken advantage of these applications to improve access to the market.

Whilst high-frequency trading is not prevalent in Nigeria at the moment, the NSE Rulebook provides that firms wishing to be considered for market-making functionality when applying for a dealing membership will need to meet higher technological requirement levels that include the ability to manage, measure and control their portfolio risk using probability algorithms that take into consideration their open positions, borrowing inventory and collaterised obligations.

In relation to high-frequency and algorithmic trading, there are currently no regulations applicable to exchange-like platforms.

The SEC Rules and the ISA do not specifically provide for the registration of market makers in high-frequency and algorithmic trading when they are functioning in a principal capacity.

Please refer to 7.7 Issues Relating to Best Execution of Customer Trades.

There are no regulatory distinctions between funds and dealers engaged in high-frequency and algorithmic trading.

Please refer to 7.8 Rules of Payment for Order Flow.

In Nigeria, financial research platforms and participants are not subject to registration. Non-registration of such platforms and participants thereto with the regulators only applies to the extent that such a platform only provides factual financial data, news, research and analytics for engaging in the Nigerian financial markets.

However, where such platforms proceed to offer investment advisory services and make recommendations as to the types of securities to buy and sell, such platforms would be required to register with the SEC.

Presently, rumours and other unverified information on financial research platforms are not specifically regulated. These platforms are currently self-regulated. Financial research platforms seek to preserve their reputation by ensuring that they gather their information from authoritative sources and due care and caution are taken in compiling their publications. They may also limit their liability by inserting language in their terms & conditions (T’s&C’s) to the effect that absolute accuracy, adequacy or completeness of information furnished cannot be guaranteed. Nonetheless, liability for false and misleading statements may be incurred under general common law principles and under the Nigerian criminal law.

Also, the Social Media Bill mentioned in 2.10 Regulation of Social Media and Similar Tools states that a person must not transmit a statement that is false or a statement that might affect the security of any part of Nigeria; affect public health, public safety, or public finance; affect Nigeria’s relationship with other countries; influence the outcome of an election to any office in a general election; or cause enmity or hatred towards a person or group of persons. To the extent that information on any financial research platform falls under any of the prohibitions, the Social Media Bill, once passed into law, will apply and offenders would be sanctioned accordingly.

Presently, there are no ways to curate conversations to avoid pump and dump schemes, spreading insider information and other types of unacceptable behaviour on financial research platforms.

Financial research platforms that provide a forum for users to exchange information harbour an inherent risk that such information may be socially and legally unacceptable and pump and dump schemes are touted. However, some platforms typically reserve the right to deny access to public forums to users. Unacceptable behaviour may prompt a financial research platform to deny access to its site. It should be noted that in the T’s&C’s developed by the financial research platform, there is typically language around limitation of liability such that users are aware that they bear some risk when they rely on information posted on the platform to make an investment decision.

There is no specific legal or regulatory requirement for financial research platforms to act as gatekeepers, in relation to suspicious or unlawful behaviour.

Nonetheless, financial research platforms may wish to do so to preserve the integrity of their brand. For instance, the authors are aware that certain financial research platforms have T’s&C’s governing user behaviour that seek to prevent posting of deceptive or unlawful information on their platforms. These platforms, however, do not necessarily monitor user behaviour and will only take action when they receive notice or a report that a user is acting in breach of its T’s&C’s.

Typically, insurtech companies may directly provide insurance services where they obtain an insurance licence from NAICOM or may serve as an aggregator where they provide the platform on which individuals can access different types of insurance cover from different insurance companies in Nigeria. Where an insurtech company serves as an aggregator, it would not be required to provide any form of underwriting services. However, to the extent that the insurtech company engages in the business of directly providing insurance services, it would be required to underwrite the insurance cover provided.

Presently, there are no specific regulations governing underwriting for insurtech in Nigeria. However, the Prudential Guidelines for Insurers and Reinsurers in Nigeria (the “NAICOM Guidelines”) provide an obligation for insurtech companies directly providing insurance services to provide a risk management framework to address material risks, which includes underwriting risk. In order to comply with the NAICOM Guidelines, insurtech companies may use sophisticated software to assess risk. In assessing risk, they may compute a predetermined algorithm. These algorithms are based on key indicators about the insured and then measured against a data set to weigh risk.

The Insurance Act provides for two main classes of insurance businesses: Life Insurance Business and General Insurance Business. Life Insurance is classified into Individual Life Insurance, Group Life Insurance and Health Insurance Business, while General Insurance Business is classified into Fire insurance, Motor vehicle, Marine and aviation, Bonds credit guarantee and suretyship insurance, and these main classes of insurance are treated differently by industry participants and regulators.

To the extent that insurtech companies are directly providing insurance services, they will be required to register with NAICOM before commencing operations and the type of insurance business they intend to provide (life, general, composite) will determine the obligations (including minimum capital requirements and registers/records) they will be required to fulfil under the Insurance Act. In general, the minimum paid-up capital requirements for a micro-insurance licence pursuant to the NAICOM micro-insurance guidelines are lower in both cases (ie, life insurance business and general insurance business), thus creating an attractive licensing framework for insurtech companies.

It should be noted that there are also separate application and registration processes for insurtech companies (directly engaged in insurance services) depending on which of the classes of insurance they provide.

There is no substantive law that regulates regtech providers in Nigeria. However, depending on the nature of tools adopted and the services provided, the activities of regtech companies may be regulated by cross-sectorial laws and/or regulation. An example of such regulation is the NDPR. Accordingly, regtech providers whose activities entail processing of personal data of data subjects would be bound to comply with the provisions of the NDPR. For instance, where the activities of regtech providers involve the processing of personal data of a customer of a financial institution, such regtech company will be directly obliged to comply with the provisions of the NDPR.

In addition, where regtech activities involve biometric certifications and fingerprint scanning of individuals on behalf of financial institutions, the regtech providers must ensure that the fingerprint scanners and related devices comply with the Testing Requirements and Checklist for Biometric Certification published by NIBSS.

Generally, the nature and terms of the contract between financial services firms and regtech providers are predominantly governed by the general principles of contract and the agreed terms of the parties during negotiation. Notwithstanding the existence of such contracts, financial services firms have a duty to ensure that specific contractual terms/clauses are inserted in service contracts to make the services consistent with regulatory provisions.

The CBN, through the Consumer Protection Framework 2016, imposes a duty on financial service institutions to ensure that they put in place effective consumer risk management frameworks so as to protect consumers’ information and assets. Consequently, financial services firms, in contracting with regtech providers, insist on assurances that the regtechs accurately process and adequately protect consumer details. Also, financial service firms impose audit clauses in such contractual documents that allow them to request and examine some relevant information from regtech providers. Since regtech solutions involve the control of data usually belonging to a wide range of persons, such audit clauses are consistent with the obligation imposed by the NDPR.

Essentially, even though there are no marked provisions spelt out by industry customs or regulations, negotiating financial service firms will include provisions that will bring the services of providers in line with existing regulations to which such financial service firms are obliged to comply with.

Generally, there is no statutory duty on regtech providers to report suspicious or unlawful behaviour. However, given that regtechs have highly digitalised solution mechanisms, it is predictably easier for these technologies to detect suspicious, unlawful or inconsistent behaviours. To this extent, it is not unusual for regtech providers to report suspicious situations to established government authorities if required or following a request by government authorities.

The application of blockchain technology in the Nigerian financial services industry is currently in its infancy but gradually gaining traction as industry players are now utilising same in their service delivery. For example, in 2018, a prominent payment service provider partnered with Microsoft Corporation (“Microsoft”) to launch a supply chain financing service in Nigeria. Hosted on Microsoft’s Azure blockchain solution, this service was created to provide seamless trade financing in supply chain operations on a single platform with end-to-end visibility. It was also widely heralded as the first enterprise-grade blockchain service in Nigeria.

Also, a US technology non-profit organisation, in conjunction with a cloud-based Croatian fintech company, partnered with Nigerian microfinance banks to pioneer a blockchain-based payment transfer network, targeted at capturing the unbanked population in the Nigerian financial services industry.

In addition, legacy players in the industry are considering the utilisation of blockchain in driving financial inclusion since it is uniquely suited in this regard by eliminating the need for third-party intermediaries as financial transactions will be executed on a distributed network, thereby cutting costs. Similarly, industry players are discussing the possibility of leveraging on blockchain to revolutionise capital market trading processes as transactions will be carried out on a transparent shared distributed ledger amongst capital market operators. This will eliminate the time spent by various intermediaries involved in capital market transactions in updating their respective ledgers.

Blockchain is currently not regulated in the Nigerian financial services industry. However, in view of the traction that blockchain assets are gaining in the financial services industry, part of the recommendations of the SEC Fintech Committee is that the SEC should work with other regulatory agencies to create clear and specific licensing regimes for different fintech business models, including blockchain technology and its related assets.

The regulators have not provided any definition or classification of blockchain assets. Accordingly, blockchain assets are generally not considered a form of regulated financial instrument in Nigeria. Consequently, the authors confirm that there are currently no issues concerning or relating to classification of blockchain assets in Nigeria.

Issuance of blockchain assets, including initial coin offerings and other related sales of blockchain assets, are currently not regulated in Nigeria.

There are no specific regulations that regulate the licensing or operation of blockchain asset trading platforms in Nigeria. Notwithstanding the foregoing, the authors note that blockchain asset trading platforms as well as the secondary trading of blockchain assets in Nigeria operate purely as unregulated trading platforms that merely facilitate transactions between parties.

Refer to 7.2 Regulation of Different Asset Classes for the asset classes that currently exist in Nigeria. Blockchain assets are currently not classified as securities/assets under the ISA and the SEC Rules.

Currently, neither blockchain assets nor virtual currencies are regulated, and, as such, defined, by any regulation or law in Nigeria.

The NDPR provides that data subjects reserve the right to request that the data controller delete personal data without delay, where the data subject has withdrawn the consent on which the processing of the data is based. This current provision seems incompatible with blockchain technology, which has the perpetual preservation of data as one of its core features. The effect of this is that blockchain technology, in its present form, would not be able to erase personal data notwithstanding the withdrawal of consent by the data subject.

Accordingly, the operation of blockchain technology may be interpreted as being in direct conflict with the provisions of the NDPR on retention and/or deletion of the personal data of a data subject. Going forward, and if blockchain is subsequently regulated, the authors would expect that the provisions of the proposed blockchain regulations will be drafted to align with the provisions of the NDPR on this matter.

There is no specific regulation on open banking in Nigeria. However, the Nigerian banking industry, under the regulation of the CBN, has over the years collaborated to create solutions or initiatives that encourage open banking for the benefit of bank customers.

In 2011, the NIBSS developed the NIBSS Instant Payment (NIP) solution; an account number-based, online real-time inter-bank payment solution that facilitates electronic funds transfer within commercial banks in Nigeria. An essential feature of the NIBSS NIP solution is its ability to interoperate with the application program interface (API) of third-party financial service providers who leverage on the NIBSS NIP platform to facilitate electronic funds transfer amongst bank customers.

Thereafter, in 2014, the CBN through its Bankers’ Committee and in collaboration with Nigerian banks introduced a centralised biometric identification system also known as Bank Verification (BVN), which is the unique 11-digit customer biometric identification number that can be verified across the Nigerian banking industry. The implementation of the BVN by the CBN was aimed at increasing banking security and reducing illegal banking transactions in Nigeria. The effect is that today, most fintech companies rely on BVNs alongside other relevant information for their lending models.

The above solutions, amongst others, have driven the expansion and security of Nigeria’s payment ecosystem, ultimately improving the payments system in the country.

Open banking in Nigeria currently tries to make available customised data and financial services via an API to a wider ecosystem of regulated third-party financial services providers, particularly in the payments sub-sector. In Nigeria, these regulated third-party providers include (i) Payments Services Solution Providers; (ii) Mobile Money Operators; (iii) OFIs such as Microfinance Banks, Primary Mortgages Institutions, Finance Houses, Development Finance Banks; (iv) Super Agents; (v) Payments Terminals Services Providers; (vi) Web portals; and (vii) Payment Service Banks.

More players in the Nigerian economy, such as mobile network operators, are already taking advantage of open banking offerings to access customer data to improve their respective data analytics and enhance their service delivery. Other service providers, such as electricity distribution companies and accounting firms, are also looking to harness open banking initiatives in Nigeria.

Financial institutions and technology companies that leverage on open banking initiatives to provide services to financial consumers in Nigeria are obliged to comply with the NDPR if the services involve processing of personal data of data subjects. These obligations include (i) formulation of privacy policy, (ii) development of security standards and measures required to protect the integrity of the personal data, and (iii) conducting and filing a yearly data audit of its operations at the NITDA. Consequently, banks, technology providers and other third-party financial service providers collaborating on open banking initiatives are mandated to comply with the provisions of the NDPR to avoid sanctions.

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Law and Practice

Authors



Banwo & Ighodalo is a leading full-service Nigerian law firm with capacity to offer legal services across several West African countries. The firm is structured as a partnership, currently comprising 12 partners and over 90 lawyers. The FinTech practice is well positioned to offer clients the benefit of its extensive technology experience, combined with regulatory and financial services knowledge. It regularly advises technology companies, start-ups and investors looking to utilise technology innovations in the complex and rapidly changing legal and regulatory landscape. The areas of work include data privacy protection, e-commerce and internet services, financial services regulation, mergers and acquisitions, peer-to-peer debt and equity financing, and payment services. It also leverages on strong relationships with regulators, banks, insurers, funds and infrastructure service providers to offer incisive, informed and innovative advice across the entire fintech value chain. Some of the firm's clients include Mastercard, Interswitch, WorldRemit, AfriQuest, Okapi and Pingexpress. The authors wish to acknowledge the contribution of the following persons in the preparation of this article: Ifeoluwa Ogunbufunmi, Damilola Wright, Seth Azubuike, Daniel Jayeoba, Imade Iyamu, Tosin Oyebanjo, and Destiny Ogedegbe.

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