Oh god! Oh god! How weary, stale, flat, and unimaginative. Seem to us all the measures proposed by the World Economic Forum – but enough Shakespeare, let’s talk about how to regulate fintech.
“The financial sector is at an inflection point,” one can read in a recent report by the World Economic Forum (WEF). Over the past decades, some financial institutions had risen to global too-big-to-fail giants. At the same time, young tech-companies have begun to disintermediate the value chain of traditional banks.
It is a potentially explosive mixture.
This is why four years ago, the World Eoconomic Forum launched an initiative called The Role of Financial Services in Society. The goal of the initiative is undisputable:
“To foster competition between traditional financial players and new entrants while also preserving system stability in light of technological advancement.”
To achieve this, various interviews with financial professionals, bankers und regulators have been conducted. Based on these interviews, different measures have been presented today. The usefulness of the recommendations is mixed, to say the least.
Not overly ambitious
The first recommendation is the most harmless one. The authors of the study recommend a debate on the ethical use of data. It is a vanilla recommendation that could be applied to all industries alike.
Also the last recommendation is not overly ambitious: proactive standard setting. This is basically a call for self-regulation. Again, nobody is hurt; it is in essence a non-measure. One wonders why a study was necessary to come up with such mundane results.
The two remaining recommendations are not groundbreaking news either. They show, however, how the basic thinking of the people involved is still attached to the established financial architecture.
Stick to the old approach
Just two months ago, the Financial Stability Board had announced its intention to have a closer look at Fintech companies. The WEF position paper now suggests a certain direction for new regulation. Unfortunately, it seems that the existing banking regulation served as a role model.
As it was initially the case with Basel I, the authors of the study by the World Eocnomic Forum propose to advance the global coordination of supervisors and create a “risk identification framework” for fintech. Obviously, they still cling on to a belief that regulators can identify, regulate and keep under control financial risks.
Proven not to work
It is a belief in the capability of regulators that has been disappointed time and again. For decades now, we are trying to fix financial regulation. After Basel I, we have seen Basel II and later Basel III. With the current initiatives trying to regulate fintech, it seems we will soon have to update the regulatory framework once again: Basel 3.1 only seems to be a matter of time.
But this is the wrong approach.
The exploding complexity of regulation is a sign that the regulatory framework can no longer aim at controlling risks; it is actually digitization that has rendered banking regulation ineffective. So in a way, it is ironic that one tries to get a grip on fintech resorting to the old regulatory approach. The way forward is to prevent the build-up of systemic risks ex ante – not to control risks ex post.
We urgently need to reconsider the way we regulate finance. The financial system is indeed changing. But instead of developing new ideas, the latest report by the World Economic Forum relies on an approach from the past that has been proven that it does not work. Staying on the beaten track, however, is hardly the right response to a financial sector at an inflection point.
- Fintech must lead the way to free finance: Fintech companies can bring our financial system to the next level – but only if they disrupt finance on the regulatory level as well. Here is how they should proceed.
- Regulating Fintech: Getting the response right: Recent developments in finance challenge regulators around the world. Fintech companies are on the rise, and it is not clear what kind of new rules are needed. To shed light on these issues, we gave a speech at the GovKnow conference on “The Future of Financial Services – Governance, Regulation and Accountability” in London.