Professor John (Iannis) Mourmouras, Senior Deputy Governor of the Bank of Greece, recently gave a wide-ranging speech at Cornell University entitled "Fin-RegTech: Regulatory challenges with emphasis on Europe". The speech offers a useful review of the Fintech landscape today (from Fintech to BigTech), before going on to consider key regulatory risks and the balance to be struck by regulators.
The impact of Fintech
The speech outlines five main effects of the Fintech revolution on customers, competition and the financial industry's operation and structure.
- Reduction of information asymmetry – for example: increased transparency of credit histories and the impact of this on borrowers' behaviour.
- Improvement of communication efficacy.
- Support for lending to SMEs.
- Support for a sharing economy – for example, through platforms that enable the matching of buyers and sellers.
- Increased financial inclusion – this point can be interestingly set against Mourmouras' later comments regarding the risks, by contrast, of increased financial discrimination facilitated by the collection of extensive consumer information by large technology companies.
Alongside the risk of financial discrimination, the speech also considers ways in which Fintech growth has the potential to increase the financial system's operational and cyber security risks. The issue of risk misallocation also arises since micro-transactions can provide a layer of diversification, with credit risk potentially passing through under-regulated channels compared to conventional financial services. Finally, Mourmouras addresses financial stability risks as competition becomes stronger with the entrance of new firms into the sector.
Financial stability implications
In this context, a Fintech report by the Financial Stability Board (FSB), from February this year, is worth noting. The report finds that the relationship between incumbent financial institutions and Fintech firms has been largely complementary and cooperative in nature. It concludes that while the financial stability implications of Fintech have generally been judged to be small because of the relatively small size of participants (with some exceptions), the picture could change quickly with the increased involvement of large technology providers.
The report draws a distinction between Fintech firms and 'BigTech' firms – large technology companies that expand into the direct provision of financial services or of products very similar to financial products. It is the Bigtech firms, with their "existing wide customer base, trusted customer relationships, strong capital positions and easy access to external funding", that the report sees as the major risk.
Filling in the regulatory gap
Mourmouras views the work of the FSB and other international standard-setting bodies as crucial to ensure the international coordination of regulatory frameworks in the context of the global dimension to most technological innovations, the interconnectedness of the financial system and the unique challenges posed by the Fintech revolution to existing regulatory systems. This is in part to avoid the risk of over-regulation stemming from fragmented regulatory approaches across different countries. For Mourmouras, it is also a question of managing the balance between the efficiency gains stemming from technological innovation and the protection of financial services users. And Mourmouras again echoes the FSB report in reflecting on the fundamental principle that activities involving the same risks in terms of financial stability and consumer protection should receive the same regulatory treatment.
And of course, as Mourmouras notes, the ways in which the fruits of the Fintech revolution might help both market participants follow regulatory and compliance requirements, and regulators assess compliance and measure risk (commonly known as RegTech), has its own role to play.
Osborne Clarke comment
This speech provides a useful perspective on Fintech at present and the issues raised for the financial industry. The forces of change will continue to give rise to regulatory challenges in the Fintech sector. The search for balance and global regulatory consistency around Fintech is ongoing. The possible advance of BigTech firms into the provision of financial services has the potential to offer benefits to consumers, but these firms are likely to be watched closely by regulators.