PUBLISHED: 11 NOVEMBER 2019
AUTHOR: Ligia Catherine Arias-Barrera
Fintech is challenging the way traditional financial regulation is conceived. Disruption is having an impact not only on the structure and functioning of the financial system, but on the role that regulators and financial supervisors must play.
The change is mainly caused by the new type of dynamic market participants and the range of new risks associated to their activity. Interestingly, despite being closely linked to the adoption of technologies to ensure compliance with regulatory requirements, a recent phenomenon known as Regtech, the line of argument that we defend here has not been extensively discussed. Our aim is to explain the state of the art, and argue why the risk-based approach to regulation allows financial regulators and supervisors to adapt their functions to the upcoming market needs. This is to find the balance between promoting growth and competition in the fintech market, and preserving efficient control mechanisms necessary to maintain financial stability.
Regulators are expected to design and implement regimes that promote innovation and competition among regulated market participants-namely financial institutions and fintech companies- without jeopardising market stability as a key regulatory objective. Attending to the wide range and multiplicity of participants of fintech (i.e. market, investors, partners, consumers and regulators), the traditional structure of financial regulation- focused on prudential regulation and rules of conduct – turns out to be insufficient to regulate the market. In an effort to find a safe and adequate regime for the realities featured by Fintech, there are several regulators that in countries as the United Kingdom, Singapore, China, Holland, Australia, among others, have chosen to resort to the adoption of regulatory and supervisory sandboxes. It is worth noting that not this is not a one-size-fits-all solution.
Our proposal does not refer then to specific intervention tools or mechanisms, but to argue that the most efficient way to articulate all the regulatory scaffolding surrounding fintech market participants, is the formulation of a clear and comprehensive regulatory strategy. In this context, a regulatory strategy becomes a road map that will guide the intervention of regulators and supervisors. It will also facilitate the promotion and control of the fintech phenomenon. Moreover, having a basis regarding the extent and limits of risk and uncertainty associated with the innovative developments of fintech, is central to the design and implementation of such a strategy. Borrowing some sociological notions of manufactured risk and uncertainty allow us to understand that the adoption of fintech triggers new categories of risk.
These are manufactured risks and uncertainties, which are usually unknown by financial regulators. The distinction between both categories from the outset might contribute to inform the process of risk identification and assessment. In this regard, cooperation between regulatory agencies and regulated firms, facilitates the integration of diverse perspectives of risks. Having an environment to exchange relevant information and specialised knowledge builds up the objective criteria to determine levels of tolerance to these new risks, and assists the design of effective control mechanisms.
Elements of risk-based regulation such as risk prioritisation and the corresponding regulatory decisions are closely related to internal control mechanisms that must be adopted by regulated firms. Thus, it is expected that fintech companies adopt some government standards and internal control systems, which are in line with observance of regulatory objectives. This in turn, might promote strong contractual relationships in light of investor and consumer protection.
Ligia Catherine Arias-Barrera
Ph.D. in Law University of Warwick
CEO-Financial Services Consulting
Professor-Externado de Colombia University
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