In the aftermath of the financial crisis 2007-09, financial regulators across the world implemented tighter controls on the majority of sectors within the financial services industry. One of the reasons for their activism may have been the lot criticism regulators have received for often being ineffective when it mattered most.

In any case, the onus lying on regulatory bodies to ensure fairness within financial markets is now greater than ever. And one of the lessons learnt over the last eight years or so, regulators are today more alert to the far-reaching implications of the FinTech industry.

The booming industry

Investment in the booming sector tripled to over $12bn last year and is expected to hit $46bn by 2020. Given such explosive growth, the immediate challenge for regulators is how to keep up with the industry’s development and ensure consumer protection is maintained, particularly when many FinTech sectors, such as peer-to-peer lending, operate outside of the traditional regulatory space for financial services. Indeed, this is the view taken by David Wright, secretary general of the International Organization of Securities Commissions (IOSCO), the global standards setter for the securities sector which brings together the world’s securities regulators.

Wright warned in October that regulators across the world need to quickly become au fait with the FinTech revolution, otherwise it will be too difficult to implement reform on areas such as clearing, settlement and collateral management further down the road, once the floodgates have opened. While praising FinTech’s ability to provide credit to small companies, Wright has urged the need to address the possible risks, adding that the IOSCO needs “to get up to speed very, very quickly”.

The UK’s Financial Conduct Authority (FCA), a non-governmental regulatory body whose mission is to ensure the successful operation of financial markets, has been one of the most pro-active authorities in responding to FinTech growth. Christopher Woolard, the FCA’s director of strategy and competition, recently outlined three major challenges that regulatory bodies need to consider when facing FinTech:

1. What do we think about the emergence of ‘robo-advice’?
2. What are the benefits and risks of blockchain?
3. Can technology help solve some of the problems we face around identifying customers and combatting financial crime in a more frictionless way?

It has also been just over one year since the FCA launched Project Innovate, an initiative designed to effectively engage with FinTech innovators, and as part of the project, the FCA has also created Innovation Hub which more specifically provides support for innovation in financial services. A team of FCA staff guides FinTech start-ups through the process of regulatory authorisation and then provides support for one year after receiving approval. The FCA will also explore how regulation can continue to be adapted to encourage growth without sacrificing consumer protection.

Regulatory Sandbox

Most recently, the FCA has emerged with the idea of a ‘regulatory sandbox’, effectively a controlled ‘playground’ environment where UK start-ups who are currently unauthorised to conduct business within the financial services industry can test their new products without having to apply for a full license. The FCA’s chief executive Martin Wheatley has perhaps best described the UK regulatory approach towards FinTech: “Innovation can benefit consumers; whether by reducing hassle, reducing costs, or improving products. So we want to ensure that regulation unlocks these benefits, rather than blocks them”.

Global regulators also appear to be creating specific institutional initiatives, much like the FCA, to ensure they can work alongside FinTech companies as closely as possible. For example, Malaysia’s Securities Commission launched the Alliance of Fintech Community in September, a project in which the regulator intends to promote the country’s network of FinTech stakeholders, in order to drive growth and innovation. It also seeks to provide regulators with more clarity about the way in which to promote financial innovation responsibly.

The commission’s chairman Ranjit Ajit Singh believes that the regulator “could play a facilitator’s role in a number of ways – be it by assisting businesses in navigating the regulatory environment, sponsoring accelerator programmes or strengthening the venture capital and private equity ecosystem to provide much-needed financing for FinTech entrepreneurs”.

What is Asia regulating?

Asian regulators, similarly, are keen to support the development of FinTech during this crucial growth phase. At the World Capital Markets Symposium in September, which brought together regulators from across the region, many policymakers emphasized that they must strike the right balance between promoting innovation and protecting market participants. Liu Jun, head of the Research Centre at the China Securities Regulatory Commission, believes that the Chinese government is adopting “a so-called laid-back approach in dealing with FinTech companies…allowing market forces to do their decision making process”, and adding that “the authorities watch closely but don’t want to intervene the consumer-facing industry”.

However, the reality is that China’s regulatory authorities have been far from reticent when proposing potential market intermediation. Indeed, the Chinese central bank is currently mulling over whether to impose a cap on online transactions as a way to curb the growth of China’s exploding mobile payments and third-party payments market (which includes notable FinTech firms such as Alibaba).

For Australian regulators, trust and confidence for the investing public appears to be top of their priority list. John Price, commissioner of the Australian Securities and Investments Commission (ASIC), recently asserted that without the trust and confidence promoted by regulatory bodies, ‘investors, consumers and participants in the financial services sector, including FinTech start-ups, are less likely to participate in it”.

Indeed, in much of its literature to date, the ASIC has taken a more risk-averse approach to FinTech innovation than a number of its peers in that it appears to determine potential risks to investors first before proceeding with discussions about collaboration.

On balance, the UK’s FCA appears to be leading the global regulatory discussion on FinTech – undoubtedly due to its status as a hub for both finance and technology, and regardless of the fact that the overwhelming amount of FinTech investment still originates from the US. This means that the position of US regulators on FinTech still carries the most weight from a global perspective. The director of the US Consumer Financial Protection Bureau Richard Cordray has emphasised the need for the legal and regulatory framework to keep up effectively with FinTech “so that all consumers can be well served and remain protected, whether they are opening their wallet or scanning the screen on their smartphone”.

Thomas Curry, the US Comptroller of the Currency (the top regulator for national banks) has also recommended that policymakers remain alert, noting that some FinTech innovations “signify real points of departures that will require a significant amount of scrutiny to ensure that they can be offered safely and soundly, consistent with applicable laws and regulations, and in a way that ensures adequate consumer protections”.

Conclusion

The cost of regulation and compliance is often one of the biggest hurdles for new FinTech companies to overcome. Therefore, it makes sense that while the industry is in a significant growth phase, the regulatory burden is not so heavy as to unnecessarily choke off innovation. Furthermore, the role the FinTech firms will play in the finance industry, especially in relation to traditional financial institutions, has not yet been ascertained – will they largely be collaborative friends to big banking, or competitive foes? It is probable they will be both; nonetheless, FinTech’s growth has triggered alarm among banks who have voiced concerns that the regulatory playing field is becoming increasingly uneven. Addressing the disparities between the two industries on an international level is likely to be a key area of focus for regulators going forward.