Financial innovation 'receiving close attention' from global watchdogs, says Carney

Out-Law News | 01 Mar 2016 | 10:09 am | 2 min. read

The "systemic risks" that disruptive technologies could pose to the global financial system are high on the agenda of international watchdogs, the chair of the Financial Stability Board (FSB) has said.

The FSB is "working with standard setters" operating across the financial services sector to develop a full picture of the potential impact of innovation on financial services as a whole, as well as carrying out its own work to "understand better the potential impacts on financial stability of operational disruption to core financial institutions or infrastructure", Mark Carney said in a letter to G20 finance ministers ahead of a meeting in China at the weekend (7-page / 67KB PDF).

The FSB, which monitors and makes recommendations about the global financial system, will discuss the outcomes of this work at its next meeting in March, and consider its next steps, Carney said in the letter. It intends to publish a report setting out the main issues and planned next steps ahead of the ministers' next meeting in April, he said.

Financial services and technology expert Yvonne Dunn of Pinsent Masons, the law firm behind Out-Law.com, said that the letter contained "some signals" that the regulatory framework "may have to be adjusted to take account of 'fintech' disrupters".

"Some more established financial services businesses have felt that the start-ups 'have it easy' in the context of regulatory burdens, and so that may be changing," she said.

"It is obviously important that for trust to be maintained in the sector, fintech firms need to be sufficiently robust. Last week, the UK's Financial Conduct Authority (FCA) was discussing how its 'Project Innovate' initiative was enabling fintech start-ups to engage with the FCA early on, to allow mutual learning, and so we can definitely see a theme developing of the regulatory landscape catching up with the fast-growing fintech sector," she said.

Project Innovate is the UK financial services regulator's programme to promote the use of new technology and business models in the financial services sector. As part of the initiative the FCA runs an 'Innovation Hub' to help companies looking to use technology to disrupt the UK's financial services sector address regulatory compliance issues, as well as a 'regulatory sandbox' through which companies can test new products and business models in an environment in which regulatory exemptions apply.

In a speech last week Christopher Woolard, the FCA's director of strategy and competition, reiterated the regulator's commitment to supporting innovation through the Project Innovate initiative. The FCA had received 413 requests for support from businesses via the Innovation Hub as of last week and had provided support in 52% of cases, he said. Approximately 30% of the companies it had supported had won regulatory authorisation to operate or were currently going through the authorisation process, he said.

The UK government used its response to a recent European Commission consultation on financial services regulation to call for a new regulatory framework based on encouraging "emerging financial services technologies" and avoiding "premature regulation that could hamper, not foster, growth". In particular, the Commission should "seek to future proof new legislation" by using "terms that can be adapted to fit changes in technology in order to allow innovative companies to take a more flexible approach to communicating with customers", it said.

Mark Carney, who is governor of the Bank of England as well as chair of the FSB, said that the regulators were particularly interested in those innovations with "potentially transformative implications" for the financial system, its users and intermediaries.

"The regulatory framework must ensure that it is able to manage any systemic risks that may arise from technological change without stifling innovation," he said.