Technology-facilitated innovation in financial services, a diverse collection of topics which coalesces under the portmanteau term of “FinTech”, is increasingly in the sights of policy-makers, whether at global, regional and national or state levels. Keen observers will have noted a proliferation of consultation documents, statements, warnings, speeches and more emanating from national regulators. Some of these recent publications address specific FinTech applications. Indeed, there has been a veritable deluge of material on Initial Coin Offerings over just the past few months.
Meanwhile bodies such as the Financial Stability Board (FSB), the influential Basel Committee on Banking Supervision (BCBS), and others, both within and without the traditional regulatory cohort, are making some efforts towards setting out (or attempt to setting out) some universal principles or truths which may address an increasingly gaping hole in the global regulatory policy canon.
We are at an early stage in the development of policy responses to FinTech, and it is perhaps unsurprising that globally agreed standards have yet to emerge.
Analogue regulation will eventually catch-up with the increasingly digital way of life. In the interim, national and regional regulators face the headwinds of economic circumstances and political aspirations to both facilitate innovation while meeting overarching objectives. In its August 2017 consultative document, Sound Practices: Implications of fintech developments for banks and bank supervisors, the BCBS sums up this challenge in its first recommendation when it urges banks and supervisors to consider how they “balance ensuring the safety and soundness of the banking system with minimising the risk of inadvertently inhibiting beneficial innovation in the financial sector. Such a balanced approach would promote the safety and soundness of banks, financial stability, consumer protection and compliance with applicable laws and regulations, … , without unnecessarily hampering beneficial innovations in financial services, including those aimed at financial inclusion.”
An increasingly common regulatory response to trying to manage this balancing act is the formation of test environments and/or the initiation of special communication channels. The FSB broadly identified three distinct types of test environments in its June 2017 paper, Financial Stability Implications from FinTech, Supervisory and Regulatory Issues that Merit Authorities’ Attention:
- “Sandboxes enable regulators to frameworks for testing new technologies in a controlled environment.
- Innovation hubs entail support of new firms in navigating existing regulatory requirements.
- Accelerators are dedicated means of cooperation, which may include funding support.”
Not all regulators are able to venture into test environment like the UK Financial Conduct Authority (FCA) has with its well-known Sandbox programme. Existing legislation and regulation in some jurisdictions may limit the extent to which regulators can provide facilities to trial innovative solutions, even in a test environment, and special communication channels may be the only option available. Such is the case for the US Commodity Futures Trading Commission which, as highlighted in a recent speech by Commissioner Brian Quintenz has encountered a legal barrier that hampers the agency setting up a sandbox. Accordingly, the US agency has developed “LabCFTC”, a communications and engagement initiative.
Another, perhaps less widely noted, activity is the formation of bilateral agreements, often referred to as “FinTech Bridges”, a convention whereby regulators in two or more jurisdictions agree to work together. Many such arrangements enjoy government backing, or even are borne out of wider government initiatives.
To date, the majority of FinTech Bridge agreements have been bilateral, but a few are emerging with more than two participants. Typically FinTech Bridges set out commitments by the signing parties to exchange information and expertise, to facilitate access for FinTech businesses to their respective jurisdictions, and – in some cases – to collaborate on joint innovation projects. A number of FinTech Bridges are in place with some jurisdictions showing a particular keenness for this approach. For example, at time of writing in November 2017, the Australian Securities and Investment Commission (ASIC) had agreements of varying descriptions with regulators in 11 other jurisdictions (see here for a list); the UK FCA with five (see here for a list); and the Hong Kong Securities and Futures Commission (SFC) with four (see here for a list) .
Both the FSB and the BCBS make recommendations on the need for regulators to bolster their skillsets to meet the challenge of supervising FinTech, with the FSB particularly recommending that, “Supervisors and regulators should consider placing greater emphasis on ensuring they have the adequate resources and skill-sets to deal with FinTech.” While FinTech Bridges may expand the opportunities for individual businesses operating or seeking to operate in cooperating jurisdictions, they also have the potential to help inform the development of an appropriately calibrated globally-agreed regulatory approach to FinTech if they deliver on the promise of sharing expertise and experience within the regulatory community.
Rather than increased economic activity across a handful of jurisdictions, it is perhaps the emergence of a pragmatic, sensible global standard based on deep insight which is the real dividend to be sought from the FinTech Bridges.
First published on Thomson Reuters Regulatory Intelligence on 01 December 2017
Cat DankosConsultant, London
+44 20 7466 7494