Regulators and central bankers bore their share of blame for the financial crisis. Most would agree with recent remarks by New York Fed president Bill Dudley that “the regulatory community did not fully grasp the vulnerability of the financial system.” Through multiagency bodies like the international Financial Stability Board and the U.S. Financial Stability Oversight Council, policymakers now look to get a better read on emerging macroeconomic and systemic risks. But what about potentially disruptive advances in business processes and technologies?
One set of such disruptions is playing out right under the policymakers’ noses: the flowering of financial technology innovation better known as fintech. Although systemic implications are undetermined — the FSB in March proposed a “framework for categorizing” new technologies — the biggest banks and securities firms are investing significant sums and human capital in R&D and start-ups in everything from microlending and mobile payments to posttrade processing and the blockchain distributed ledger.
In fact, individual regulators are weighing in, some more tentatively than others. It’s good that they are not of one voice — they avoid being blinded by groupthink. However, some agencies are not just implicitly encouraging fintech, saying it is too early to intervene; they are also advocating and, in effect, putting some skin in the game.
A case in point is the Monetary Authority of Singapore — the central bank serving one of the world’s fintech investment hotbeds. Last July, MAS announced its FinTech & Innovation Group, led by chief fintech officer Sopnendu Mohanty, formerly of Silicon Valley–based Citi Ventures, which includes an innovation lab to “work with the industry and relevant parties” on technology development and testing.
Companies “do not have to seek MAS’s permission to do new things,” the authority’s managing director, Ravi Menon, explained in an April panel discussion. “Sometimes, as Nike puts it, you have to ‘just do it,’” he said, adding that MAS is formulating “a regulatory sandbox approach that aims to give FIs [financial institutions] more confidence to experiment and launch their innovative products or services within controlled boundaries.” Failures, which are inevitable, should occur “safely and cheaply, without larger adverse consequences.”
Singapore’s won’t be the only regulatory sandbox. The U.K.’s Financial Conduct Authority, building on its 18-month-old Project Innovate, is accepting initial applications for a similar “safe space” where oversight is light until a product gains traction. “We think this strikes the right balance — regulation that starts in proportion to the scale of the concept being tested and can grow with the ambition of the full business model,” FCA director of strategy and competition Christopher Woolard said in an April 11 speech.
The European Securities and Markets Authority, which has a Financial Innovation Standing Committee, held its second Financial Innovation Day last December in Paris. Belgian financial services regulator Jean-Paul Servais, chair of ESMA’s standing committee, stated then that “positive benefits originating from financial innovation are sometimes overlooked when the topic is discussed in favor of adverse innovations tied to the financial crisis. We bring to the subject a balanced approach, both protective and supportive.”
“Responsible innovation” has been the mantra of Thomas Curry, the U.S. comptroller of the currency, who in introducing a March white paper on that topic said, “It’s possible that we’ll decide we need a new office dedicated to innovation, just as some banks have developed innovation centers, but we haven’t made that decision yet. At a minimum, we’ll want to be sure we have the capacity to identify and understand new trends and technology, as well as the emerging needs of the consumers of financial products.”
To the fintech community, the message overall is friendly and accommodative. It might even satisfy the outspoken regulatory free-marketeer J. Christopher Giancarlo of the Commodity Futures Trading Commission. He warns that blockchain, for instance, is “at risk of being stymied by disparate and uncertain regulation.” Just beware of regulators becoming too competitive with one another or too close to those they regulate. •