The Regulatory Diagnostic Toolkit (RDT) provides a framework of analysis for financial regulators to use to assess, adapt and advance their regulatory regimes for Digital Financial Services (DFS)(1). After applying the RDT, financial regulators will be well-positioned to determine the extent to which their country has an enabling and risk-based regulatory regime for DFS that is aligned to their objectives for DFS.
With digital technology transforming the financial services industry, it is now imperative that financial regulators are well-equipped to regulate and supervise the provision of DFS.
In many emerging countries the introduction of DFS has led to impressive advances in financial access. However, DFS present several challenges to regulators. How can a competitive environment be fostered in the interests of improved products, prices and innovation? How can consumers be protected? How can customers’ funds be safeguarded against provider illiquidity or insolvency? And how is a regulator to do all this within existing technical capacity and resource constraints?
The RDT provides financial regulators with the clarity, perspective and structure needed to respond to these challenges. The RDT begins with an assessment of the current market situation and the regulator’s objectives for the market. The RDT then provides a framework for regulators to analyse their regulatory regimes to identify barriers to the growth, or gaps in the regulation, of DFS or gaps in data-driven evidence underpinning the policy development process.
The RDT provides an objective means to assess regulatory frameworks and identify the aspects of those frameworks that may need review and adjustment. It assists regulators to optimise their regulatory capacity by prioritising and allocating regulatory resources in line with their objectives for market development.

Goals of the RDT
The RDT supports regulators to align with current international best practices such as those identified by the Global Partnership for Financial Inclusion, the Consultative Group to Assist the Poor, the Better Than Cash Alliance (BTCA), the Alliance for Financial Inclusion and other organisations active in this field. To this end an expected outcome of using the RDT is an improved capacity of regulators to promote optimal linkages among financial inclusion, financial stability, financial integrity and consumer protection.
The RDT is a support for broader DFS ecosystem diagnostics such as the BTCA’s Ecosystem Diagnostics Toolkit. The RDT provides an analytical framework for conducting an improved policy development process which is firmly grounded in data-driven evidence-based research. The goals of this analytical framework can be summarised as:
1. Reduced barriers to entry for digital payment services and other retail financial services;
2. A level playing field and flexibility in the market to promote innovation;
3. An effective yet proportionate approach to consumer protection;
4. Sustained rapid growth and large scale volumes; and
5. Access to market information for providers while ensuring security and privacy of customer data.

Seven Subject Domains of the RDT
Having regard to these goals above, the RDT contains seven subject domains which capture the many regulatory issues connected to DFS, including market conduct, prudential regulation, payments oversight, competition and privacy.

Each subject domain in the RDT includes a subsidiary list of issues for regulators to consider when assessing how well their regulatory regime supports the development of the DFS ecosystem as envisaged by the regulator. Regulators are not expected to address the issues under each subject domain comprehensively. Rather, the subject domains provide regulators with a structured approach to assess their regime such that the main regulatory issues connected with DFS are considered and not inadvertently overlooked.

The seven subject domains are:
1. Regulatory Architecture
This domain aims to provide an overview of the country’s DFS regulatory regime and helps identify and assess factors that give rise to barriers to the adoption, or gaps in the regulation, of DFS in relation to regulatory mandate, capacity and coordination.
2. Building the Ecosystem
This domain examines the regulator’s intention and capacity to implement enabling regulation so as to support a sustainable DFS ecosystem. The dimensions include competition, innovation, consumer demand, financial literacy, interoperability, partnerships, and public access to market data.
3. Protection of Funds
This domain assesses the country’s regulatory regime for protecting the e-money funds, and evaluates whether these regimes effectively protect customers’ funds from insolvency, liquidity and operational risks.
4. The Use of Agents
This domain examines the existing regulatory and contractual arrangements with regard to the use of agents, the allocation of liability, and the management of credit, liquidity and consumer risk that may arise among the provider, agent and customer.
5. Consumer Protection
This domain assesses the effectiveness of the country’s financial consumer protection framework, considering regulatory mandate, industry codes, product disclosure, recourse mechanisms, use of agents and digital delivery of financial services. It is expected that in emerging markets a proportionate approach is taken, which means one that takes into consideration local context and the cost of the framework for regulators, providers and consumers are proportionate to the risks.
6. AML/CFT
This domain evaluates how well the country is doing in terms of balancing the implementation of proportionate anti-money laundering/countering the financing of terrorism (AML/CFT) measures and the promotion of financial inclusion. Dimensions assessed include the use of a risk-based approach, the adoption of simplified Consumer Due Diligence (CDD), transaction monitoring and reporting, and new approaches to AML/CFT.
7. Data Privacy
This domain reviews the country’s regulatory and contractual mechanisms for protection of customers’ data and privacy. Four dimensions are considered: the rights of individuals to privacy and data protection; the sharing of customers’ financial information among financial services providers; the use of customers’ credit information; and consumer redress mechanisms for misuse of data and infringement of privacy.

Application of the RDT
The RDT does not seek a generic approach to the regulation of DFS across the globe. Regulations work best when they are responsive and specific to the needs and realities of a country. Each country will have views on how its DFS ecosystem should develop which will shape their regulatory regimes. This local context is important. The assessment using the RDT must align with the current market context, the regulator’s vision and objectives given that market context, and the local definition of success.

Through the emphasis placed on data/evidence gathering, the regulator can decide which of the seven domains it might best address first. The diagnostic exercise can also serve as an analytical basis to assist regulators and development partners to reach consensus on the prioritizing regulatory issues

Pilot of the RDT
The UNSW Digital Financial Services Diagnostic Team (UNSW DFS Diagnostic Team), in collaboration with UNCDF, piloted a full application of the RDT in the Solomon Islands and a partial application in Nepal.
Lessons learned from pilot work suggest that early and extensive collaboration among domestic regulators, external consultants and local champions from international development agencies improves the diagnostic process itself. Collaboration underpins the process of domestic regulators understanding and engaging in the RDT process and the recommendations which emerge from it. The pilots also demonstrated that while the RDT can be used as a self-assessment tool, it would benefit from being implemented with support from external consultants or local specialists of international development partners. External support can alleviate resource constraints and provide sufficient drive to complete the RDT process.
The RDT is available for public use and can be refined and adjusted as necessary. It can be download here.

(1): A ‘regulatory regime’ refers to both the tools (legislation/regulations/guidelines) and the use of these tools (oversight/supervision/market-monitoring).