Emir BAYRAMOĞLU, LL.M.
“FinTech” refers to the use of technology to deliver financial solutions; it is widely seen as a uniquely recent marriage of financial services and IT. FinTech’s scope involves payments, personal finance, P2P lending, insurance, digital banking, equity crowdfunding, smart contracts and cryptocurrencies. Financial innovation waves counteract gatekeepers and intermediaries by giving the opportunity to end users to customize their use of financial products. The industry will never be the same again due to other innovations such as blockchain, which also challenges banks to evolve even their most basic practices. The following info graph shows the global landscape of the FinTech market in 2016:
The new age disruptive innovation has an essentially feature which differs from the other existing ones. Since we live in an uncertainty, new and upcoming technologies are less centered around a specific place, which makes it much more difficult for business leaders and governments to develop a coordinated and controlled deployment and in the result of that fact consumers also play a much more important role in the acceptance and dissemination of the technologies. This dissemination phase is faster than ever; thus, it is a big task for governments to keep their regulations up to date. The pressure of time means that governments will gradually face more insurmountable challenges in the future. One of the biggest concerns related to the fast evolution of the platforms is selecting the wrong -or at least the contested- fact as a basis of regulation. This threat can direct governments and organizations to stay passive and does not regulate anything at all but making mistakes. For instance, in February 2016, the European Commission delayed the introduction of the regulation, Mifid II, by one year, with taking into account the critics.
In addition, two surveys (as follows) conducted among financial executives, clearly shows that FinTech’s continue to face significant barriers as a result of regulatory realities; albeit, transformation is inevitable.
Technology is a competitive threat but at the same time, also means solution. As the Ceo of “The Financial Brand”, Jeffry Pilcher stated, “‘In Tech We Trust’ may be the banking industries new motto”. Policy makers should also use technology efficiently, because a successful digital transformation strategy is not only a policy document but also provides a dynamic and an evolving process which allows for discovery and feedback. Lawmaking and regulatory design need to become more proactive, dynamic and responsive.
Due to the scope of FinTech, it is hard to talk about a “FinTech Regulation” per se. Therefore, it is better to separate high-level approaches (e.g. risk or product based approaches) and consummate a subset of specific regulations with them (e.g. payments, anti-money laundering).
Mainly, financial regulators have 4 key mandates:
- Financial stability:
Economy is inherently unstable. Due to that fact, if it is left untracked, there is a big possibility for the economy to go through long and frequent periods of recession.
- Prudential Regulation:
Prudential Regulation is a type of financial regulation which requires financial firms to control risks and hold adequate capital -as defined by capital requirements- and its objective is to ensure some vital functions such as facilitating payments, providing liquidity, pooling savings & risk sharing are maintained. However, there are still some obstacles to estimating the buildup of financial risks. First, despite hard efforts, significant accounting differences still exist around the world, which make it difficult to make international comparisons amongst the banks. The second problem is related to auditing standards; because audits appear to be very expensive but in contrast, provide little useful information. These two standards also harm transparency. Last but not least, despite being able to take the right action against the changing circumstances, statistics are crucial for policymakers. Thus, a healthy interpretation of statistics is a must. At this stage, big data might be the solution. Because, as Borio stated, “The main reason why crises occur is not lack of statistics but to failure to interpret them properly and take remedial action”.
- Conduct and Fairness.
- Competition and Development:
Barriers to competition diminish opportunities for innovation and growth, and is also harmful for end-users. Effective competition is not automatic. Only a well designed competition policy can help markets work better and provide a level playing field for domestic SME’s and start-ups.
It is not easy to fulfil all of these mandates. Regulators have to conduct level-headed strategies for the questions of, “What, When and How” to regulate:
- The “What” question is pertinent to identifying the disruptive technology which must be regulated. For that judgment, facts about that particular topic are very important. However, identification of relevant facts is not easy, since regulation of any disruptive new technology is always based on an uncertain and politicized factual basis.
- The “When” question concerns the timing of regulatory intervention, in other words, the regulatory threshold. A problem with the new emerging FinTech companies is that they have limited track records regarding their business and it is difficult to identify what their obligations are (g. applicable regulations or licences). If a regulation is adopted very soon, it is probably going to distort technological development. Technology needs time (shorter than the past) to find its final use and applicability; and the market needs to settle before the regulatory intervention. This approach is also consistent with the cost-efficiency principle. On the other hand, if it is too late, problems will arise in consequence with the absence of an effective regulation.
An example -which is given by Arner/Barberis/Buckley- clearly illustrates the chart below:
“Money Market Funds (MMF) offer an example. Three of the largest players in this sector (Vanguard, Fidelity and Schwab) was established in 1975, 1946 and 1971 respectively. In 2014, Alibaba, an e-commerce business in China, started to offer a new MMF that is fully online and available to its pre-existing customer base. Within 9 months, Yu’E Bao became the world’s 4th largest MMF, on a par with decade-old players such as Vanguard or Fidelity”. This 9-month period shows how a new generation firm went from “too small to care” to “too big to fail” within the space of 9 months. This exponential growth represents a great challenge, since it is the sign of rapid change and development of the conditions of the market.
- The “How” question is related to the form and substance of the regulation. There are different styles of rules which are: require, encourage, enable or support; a good legal system must have all these kind of rules. In addition, the “how” question addresses the issue of which principles should be adopted to achieve regulatory goals. Future’s FinTech regulation is based on a data-driven, principle-based approach, which embraces regulatory sandboxes.
 Arner, D. W., Barberis, J. N., & Buckley, R. P. (2015). The Evolution of Fintech: A New Post-Crisis Paradigm? SSRN Electronic Journal. doi:10.2139/ssrn.2676553, p.3.
 https://www.dealsunny.com/blog/fintech-digitally-disrupting-the-financial-world-infographic (last visited: 12.05.2018).
 Vermeulen, Erik P.M. (2017). “Co-Creating” an An Automated Future Together, https://hackernoon.com/co-creating-an-automated-future-together-b529b629964a (last visited: 12.05.2018).
 Vermeulen, E. P, Fenwick, M., Kaal, W. (2016). Regulation Tomorrow: What Happens When Technology is Faster Than The Law, TILEC Discussion Paper No. 2016-024, p.12.
 https://www.ft.com/content/ae935520-96ff-11e7-b83c-9588e51488a0 (last visited: 12.05.2018).
 https://www.financemagnates.com/fintech/news/survey-fintech-companies-most-worried-about-regulations/ (Last visited: 12.05.2018).
 https://thefinancialbrand.com/63617/digital-banking-strategies-fintech-data-analytics/ (last visited: 12.05.2018).
 Pilcher, J. The Digital Banking Revolution: Who Will Survive? https://thefinancialbrand.com/63617/digital-banking-strategies-fintech-data-analytics (last visited: 12.05.2018).
 For example, the UK FCA has already started to evaluate the benefits provided by the blockchain : https://www.fca.org.uk/news/press-releases/financial-conduct-authority-provides-update-regulatory-sandbox.
 Vermeulen, Fenwick, Kaal. p. 18.
 Arner, Barberis & Buckley, p.32.
 White, W. R. (October 2013). The Prudential Regulation Of Financial Institutions: Why Regulatory Responses to the Crisis Might Not Prove Sufficient. University of Calgary, The School Of Public Policy: SPP Research Papers, 6(33). Retrieved from https://williamwhite.ca/sites/default/files/w-white-prudential-final.pdf (last visited: 12.05.2018), p.1.
 White, p.39.
 Borio,C. (April 2013). “The Great Financial Crisis: Setting Priorities for New Statistics,” Bank for International Settlements Working Paper 408, April 2013.
 Godfrey, N. (2008). Why Is Competition Important for Growth and Poverty Reduction, available at: https://www.oecd.org/investment/globalforum/40315399.pdf (last visited: 12.05.2018), p.4.
 Vermeulen, Fenwick, Kaal, p.7.
 Id, p.9.
 Arner, Barberis & Buckley, p.34.