Welcome to installment #3 exploring whether -- and/or how -- financial regulators are competing with each other regarding FinTech regulatory standards.
Previous installments focused on what kinds of policies fall within sandbox toolkits (Post #1) and the potential pitfalls associated with having sandbox licenses (Post #2). We are working our way through the pyramid at the bottom of our FinTech Sandbox Infographic.
We started with the base of the pyramid, where we see the largest amount of activity at present: Access. So far, we have not yet found any concrete evidence of traditional regulatory competition in the sense of policymakers attempting to attract FinTech companies through different policy frameworks.
Traditional regulatory competition involves policymakers setting domestic standards for the purpose of either restricting access to domestic markets by foreign firms or for the purpose of increasing the competitiveness of domestic institutions. Instead, we have seen the opposite of competition: the proliferation of Memoranda of Understanding that facilitate cross-border sandbox participation.
Conduct Regulation in a Nutshell
Today's post works up a level to look at the second-largest category of FinTech regulation: standards regarding conduct. These rules cross multiple subject matter areas, from consumer protection and regulatory report to anti-money laundering and data privacy regulations. Most FinTechs are subject to at least some of these regulatory standards if they are responsible for managing or transferring other peoples money (payments, banking, investing, investment advice). Some may become subject to these regulatory standards if they provide third-party vendor services to regulated financial institutions.
FinTech sandboxes by definition provide firms with a "safe space" to create working prototypes free of traditional regulatory compliance burdens. Those FinTech firms already handling customer funds comply with existing conduct regulations as a condition of conducting their non-banking operations. Consequently, it is inaccurate to assert that FinTech firms are unregulated entities. It is instead far more accurate to say that their activities at present operate outside the banking regulation umbrella.
The question then becomes whether jurisdictions will attempt to compete for FinTech talent and innovation on the basis of different conduct regulations.
Policy Trend Projection -- Competition Unlikely on Conduct Regulation
The policies underpinning conduct regulations apply to a much broader set of institutions than just FinTech firms. They address a broader range of domestic policy interests associated with fostering trust in the financial system, ensuring policymakers receive the information they need to make decisions, and protecting the financial system from being subverted by criminals.
Many of the conduct policies are made domestically and reflect local if not societal priorities which can shift from country to country. The best example of these idiosyncratic regulatory standards arises with respect to data privacy standards. Most if not all nations agree on the need to protect personal data, but substantial differences of opinion (and policy) exist regarding the best way to promote this objective. Similar societal differences arise with respect to consumer protection standards. Anti-money laundering standards, however, are made internationally so a high degree of policy convergence exists at the normative level if not always on the enforcement level.
It seems highly unlikely that FinTech firms will receive special permanent exemptions from standard conduct regulations. Instead, it is far more likely that the standards themselves will evolve as financial intermediation becomes more digitized and automated.
For example, current regulations setting suitability standards for what kinds of investments are offered to individuals will need to be updated if not revised completely for scenarios involving automated investment advice (robe-advice), particularly if investment advice becomes more accessible to a broader set of less wealthy individuals that arguably have more to lose if an investment loses money. Reliance on distributed ledger technology in the insurance sector may require new and different kinds of consumer protections.
Policymakers may compete for the prestige of being the first to figure out how to update individual conduct regulations for the digital era. But this is very different from competing for the purpose of creating competitive advantages for local firms.
And yet, on any given day, the sense of regulatory competition among different jurisdictions is palpable. So our next post will assess another policy area where FinTech competition is more relevant: fiscal policy.