#FinTech Firms -- The Regulators Are Coming For You
Summer vacation is officially over. On the last day of August, the Basel Committee on Banking Supervision has thrown down the gauntlet. It has requested comment by 31 October 2017 (yes, Halloween) on ten different recommendations regarding FinTech oversight.
The consultative paper provides useful insight into the research and data policymakers find compelling. It also generates interesting implications for the FinTech industry as a whole. Three things stood out to me as I read the consultative paper today. They are:
1. Policymakers are moving swiftly to expand the perimeter of banking regulation to the FinTech sector.
Recommendations 1, 2, 4, 5, 7, and 9 all seek to ensure that banking regulators are ready, willing and able to apply existing licensing, conduct, AML/CFT, consumer protection, and data protection standards to FinTech firms...even if those firms are not formally licensed as banks.
This is not a surprising development. It is consistent with long-standing efforts to extend the substance of banking regulation to key third party contractors to banks, particularly in the United States as our blogpost noted HERE last spring. It is also consistent with the banking industry's broader concerns that competitiveness and efficiency gains within the FinTech sector are being achieved through uneven application of regulatory and compliance burdens.
Last year, I had the honor to participate in the White House Summit on FinTech issues followed shortly thereafter by a similar summit hosted by the Office of the Comptroller of the Currency. U.S. policymakers shared with FinTech firms the enthusiasm for the promise of a more inclusive and efficient financial system powered by modern innovative technology. It was less clear at the time that FinTech firms shared with policymakers a passion for protecting financial stability. Many (but not all) FinTech firms also displayed a surprising naivety regarding the prospect for having to comply with traditional regulatory standards applicable to the intermediation business. If the perspectives in the U.S. last year remain indicative of attitudes across the industry today globally, FinTech firms are in for a rude shock if they fail to pay attention to this Basel Committee initiative.
2. Policymakers are moving swiftly to embrace RegTech.
Recommendations 7 and 8 indicate policymakers are thinking creatively about the potential to rely on advanced, innovative technology to increase the effectiveness and efficiency of their own oversight structures. Recommendation 8 expressly urges all supervisors to "consider investigating and exploring the potential of new technologies to improve their methods and processes." Recommendation 7 urges banking supervisors specifically to "consider whether additional specialized skills are needed to complement existing expertise."
Yes, regulators could soon start poaching FinTech experts to serve in the official sector just as they poached derivatives experts and credit risk modeling experts in the past.
3. FinTech is a very international competitive arena.
A few months ago, this blog highlighted how regulatory cooperation agreements and MOUs were proliferating like rabbits. You can find that analysis HERE. We were ahead of the curve, of course.
Look at Recommendation 6. It indicates that cross-border regulatory cooperation is "essential." It encourages policymakers to "coordinate supervisory activities for cross-border finch operations, where appropriate." This is more a reflection of reality than an aspiration.
As our blogpost noted in the spring, one key component of the current crop of FinTech MOUs is the provision that facilitates entry into sandboxes and regulatory accelerators between partner countries.
Your businesses may currently look profoundly local right now. Your data and customers may look profoundly local right now. But policymakers from the UK to Hong Kong to Australia to the Middle East are thinking bigger. They have already started to craft a regulatory cooperation framework that anticipates certain business technologies and business plans will operate in multiple jurisdictions.
Here is the best part....consider all the major buzz words that were left out of the recommendations: crowdfunding, blockchain, distributed ledger, digital currency, roboadvice. All these issues (and more) are implicated by the Basel Committee's consultative paper even if they are not front and center in the relatively bland and broad recommendations.
Conclusion: If you are not already tracking cross-border similarities and divergences in regulatory trends regarding FinTech oversight, you run the business risk of falling behind the curve competitively. Forward-thinking firms are already starting to think about how they could achieve scale by operating in multiple countries simultaneously.