Chile financial services watchdog outlines regulatory gaps, sector challenges

Chile has closed regulatory gaps in the financial services sphere via adoption of best international practices but work is still needed in some areas, a senior watchdog official said.

Among them is the insurance sector.

“We have an insurance industry that has grown, one that is quite sophisticated but we have a legal framework that requires modification and urgent revision,” said Kevin Cowan (in photo), vice chairman of Chile’s financial services commission (CMF).

“It’s a capital framework that doesn’t require capital based on risk but rather on asset limits,” Cowan told a webcast hosted by the business school of Santiago-based Universidad Mayor.

This, he added, can potentially impact compliance and asset allocation. 

In 2018, CMF sent the finance ministry associated draft legislation.

Cowan said he hoped lawmakers would advance the initiative. “This would allow us to close gaps.”

The webcast was told the current insurance framework did not facilitate the introduction of some specialist, inclusion-focused products such as parametric policies. 

Chile’s insurance market is one of the biggest and most developed in Latin America. 

Other areas where further work is still needed include oversight of financial conglomerates, implementation of Basel III rules - pushed back last year amid the pandemic - and national cybersecurity coordination. 

In the cybersecurity and operational risk sphere, CMF has put out to public consultation a draft regulatory framework for the insurance sector, scheduled to be followed by a similar push geared to the securities industry. CMF has already introduced associated rules for banks.

Addressing climate change and environmental, social and governance (ESG) practices through a regulatory lens was also necessary, the webcast was told.

Last year CMF published a climate change strategy for financial services sector players. 

The watchdog said at that time that it was “aware that climate change represents an enormous challenge for the country and that it will do its part by overseeing the correct functioning and the stability and development of the financial market so that Chile can face climate change successfully, managing risks and taking advantage of the opportunities that this new scenario brings.”

During the webcast, Cowan said climate change “is a relevant risk in Chile and is therefore a relevant risk for the financial sector.”

On the wider topic of the medium-term challenges facing stakeholders in the financial sector, three main areas were outlined: helping the economy recover, improving levels of financial inclusion and education, and strengthening the consumer protection and market conduct framework. 

In terms of economy recovery efforts, the webcast was told that supporting non-bank lending such as crowdfunding via approval of fintech legislation was a pillar. A draft fintech bill was presented in November. 

After an estimated contraction of 6.3% last year, the World Bank expects Chile's economy to expand 4.2% in 2021, above the 3.7% forecast for the whole region.

Regarding market conduct, CMF last year outlined plans to migrate to a regulatory and supervisory framework based on what is known as the twin peaks model. CMF said at the time that the move followed IMF recommendations and would bolster capacity in the spheres of market and solvency oversight and financial client protection.