The Future, FinTech and the Regulator

compliance digital developments in financial services compliance financial services fintech regulation Oct 20, 2021
The Future, FinTech and the Regulator

Evolution, simply put, is a process of change and adaptation. Regulatory practices and approaches evolve too. From a Darwinian position, those characteristics that are functional, effective and desirable are passed down. Those that are not are cast aside. Only the fittest will survive. The weak and ineffective fall away. To be a resilient and nimble regulator, one has to always focus on the objectives of regulation while being forward-looking.  


The Forced Evolution of Regulation

At present, regulation is undergoing another evolution forced by the speed of technology. This forced evolution requires a bit of design thinking to be applied: 

  1. to properly regulate innovative derivatives in financial services, and 
  2. to find the ‘right’ regulation for an increasingly digital world. 

The disruption that innovation has brought has resulted in vastly different reactions amongst regulators. The initial inertia for some regulatory authorities allowed others to sprint ahead.    


Varying Focal Points 

Central Banks now appear to be in lockstep in the development of Central Bank Digital Currencies (CBDCs). Where there is no central bank, the primary regulators have varying focal points. Sectoral regulators are driven by the FinTech developments that fall in scope, and single regulatory bodies may select areas to embrace innovation. For Small International Financial Centers (S-IFCs), there are huge benefits! Many gravitate towards developing frameworks around digital payments systems and neo banks to improve the speed and reduce the cost of cross-border transactions and enhance payments systems to spur domestic and international trade. Regardless of the focus, the actual engagement between regulators and innovators remains vastly different around the world.

The Desire for more Engagement with Regulators

Innovators are desirous of more engagement with regulators. Sadly, the needed engagement is not yet occurring with enough depth and breadth. Early comments of eliminating regulators (some of which remain to some extent) did little to engender a closer embrace. Antagonists in the FinTech space are being phased out, in part, because of useful dialogue between regulators, industry bodies and innovators. However, what has occurred, and shows no signs of change, is the scrutiny being placed on regulators and their mandates. You see, in an increasingly digital world, there will always be those that are resistant to change – fear that machine learning (the other ML) will eliminate their roles. Coding will not eliminate regulators!  


Shifting the Focus

Regulators must have a thorough understanding to be effective. In the diverse FinTech and digital space, that means they must attain the needed skills and be aware of trends that are emerging. Yes, regulators need to learn how to code, apply machine learning, level up their data analytics, consider gamification of key regulatory requirements… everything needs to be on the table for the 21st-century regulator!  

Regulators also should not get ‘hung up’ on the negative perceptions around crypto, DeFi, NFTs and other innovations. Focusing on the negatives instead of the profound benefits – financial inclusion, cheap and fast cross-border remittances, the elimination of counterfeiting and more – will likely result in over-regulation and missed opportunities. And the crypto community is very aware and is increasingly vigilant on the actions of regulators!  


Embracing Transparency and Remaining Relevant  

Whatever the future may bring, all regulators are increasingly aware that they are accountable for their actions. Accountability will be particularly relevant given the increasing scrutiny from peer assessments, savvy stakeholders and innovators. It’s no longer just standard setters that pay close attention to and critique regulators. Journalists, politicians and the wider public are tuned in, paying closer attention and commenting on social media about their opinions about regulators (and regulations). If regulators are to remain relevant and ensure their future longevity, they must engage, adapt and embrace transparency in their actions.

Finding the right fit in a digital age can be achieved. The tech cycle is incredibly fast. Business practices are also pivoting faster, and so too must regulation. The legislative cycle has to be hacked and made less of a glacial flow and more synced to dataflows. More regulators need to be mindful of the pendulum swing – the ebb and flow of regulatory reform. However, one of the present dangers given the speed of FinTech advancements is the possibility of regulatory fatigue in the rush to reform laws in a piecemeal manner. Numerous upgrades in regulation are often anything but, particularly when they are disconnected from dialogue and data.  


What can Regulators Do?

So what can regulators do? The first strategic action that I have observed is for regulators to hire differently. The Financial Conduct Authority (FCA) and the Monetary Authority of Singapore (MAS) are two regulators that stand out for embracing the need for new skills at an early stage. Roles and responsibilities for modern regulatory engagement have changed (even if existing job descriptions haven’t). Skills assessments and tailored training are also needed. Collaboration through bodies, such as Global Financial Innovation Network (GFIN), have also served to enhance skills - though there remain far too few Caribbean-based regulators as members of GFIN at the time of writing.


Reading the Room 

The shift in scrutiny on regulators in the age of innovation is not a familiar position for regulators. If we ‘read the room’, we can sense that the scrutiny will not be going away. Regulators that win are not the ones that legislate and regulate without engagement, simply because they have the power to do so. Nimble regulators can be the superstars for innovators – if only they are willing to engage! My call to fellow regulators - Be fast! Be flexible! And be brave! After all, it is a brave new world!