How Regulators can help Fintech?

How Regulators can help Fintech?

by July 12, 2017
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The Asia Securities Industry & Financial Markets Association (ASIFMA) has formulated a set of ten best practices to guide regulators in Asia as they seek to support the development of Fintech to better serve consumers, businesses and investors.

Fintech is dramatically changing the face of the financial services industry, and offers the potential for increased productivity and efficiencies in the way financial services are delivered. It has also challenged policymakers worldwide as they develop regulations that strike a balance between promoting innovation, maintaining the resiliency of the financial system and ensuring consumers are protected.

ASIFMA is an independent, regional trade association with over 100 member firms comprising a diverse range of leading financial institutions from both the buy and sell side, including banks, asset managers, law firms and market infrastructure service providers.

Through its collaboration with Herbert Smith Freehills, ASIFMA has come up with 10 best practices for regulators in Asia to facilitate the growth of Fintech.

Best Practice 1: Support the development and adoption of responsible, safe and secure Fintech products and services, by facilitating dialogue between Fintech participants and financial institutions and policymakers.

Financial regulators should engage in regular dialogue with Fintech companies to understand the industry landscape, including new product and technological developments and trends. Regular dialogue will also allow regulators and the industry to identify opportunities and risks at an early stage of product/service development.

 

asian e-commerce

Caption: Regulators need to keep in touch with the latest in the Fintech industry to balance innovation and consumer protection. via pixabay

ASIFMA supports the steps taken by Asian regulators to better understand new financial technologies and their implications for existing policies. Such steps include establishing dedicated Fintech offices, contact points and hubs; and establishing ‘regulatory sandboxes’, where businesses may test products in an environment with certain regulatory flexibilities for a limited duration.

Best Practice 2: Work with the industry to explore regulatory technology (Regtech) solutions to create more efficient and effective regulatory supervision and reporting mechanisms.

Regtech has the potential to provide configurable, reliable and cost-effective solutions in the regulatory arena.  A major advantage offered by Regtech is that it enables the storage and analysis of massive and complicated data, and it has the potential to simplify compliance monitoring activities. Regulators should leverage the experience of other regulators in using new technologies to access and process the increased volume of available data, helping them to promote investor protection, market fairness and financial stability.

Best Practice 3: If required, develop regulatory policies that strike an appropriate balance between innovation, safety, and consumer protection.

Regulators should formulate principles-based guidelines that allow Fintech players to develop new products or services that meet the needs of consumers whilst at the same time advancing regulations. Regulations should be designed with sufficient flexibility, as opposed to being overly-prescriptive. A one-size-fits-all approach to policy-making is not conducive to technological innovation.

Best Practice 4: Ensure consistent regulatory standards are applied to all market participants.

Competition is increasing in the Fintech sector. McKinsey estimates that new entrants will increasingly battle for customers with incumbents over the next decade, with the top five banking businesses (i.e. consumer finance, mortgages, lending, retail payments, and wealth management) at risk of losing between 20 percent and 60 percent of their profits by 2025.

Regulators have a role to play in ensuring a level playing field between existing incumbents and new entrants. Both incumbents and new entrants need the regulatory space to explore and test new ideas. Equally, when a product poses a risk to the system then incumbents and new entrants should have the same regulations applied to them.

Know-Your-Customer and Anti-Money Laundering requirements are examples of regulation that should be equally applied to incumbents and new entrants. Both are key to protecting the financial system.

Best Practice 5: Ensure inter-agency cooperation to promote consistency nationally across different sectors impacted by Fintech such as banking, securities, insurance and telecommunications.

Providing a uniform approach will better assist Fintech start-ups with developing their strategies and navigating the regulatory landscape, and regulators, government agencies and ministries can also benefit from sharing experiences and know-how. For example, the Monetary Authority of Singapore (MAS) has set up a Fintech Office that looks at aligning Fintech-related funding schemes across government agencies, and also proposing cross-agency strategies in industry infrastructure.

Best Practice 6: Enhance cross-border cooperation with other regulators to promote use of best practices, recognition agreements and harmonisation of laws and regulatory requirements.

Fintech transcends jurisdictional borders, and therefore cross-border cooperation amongst regulators is critical.  Recognition agreements can also allow Fintech firms to more easily cross borders to pursue opportunities. The agreement between the MAS and the UK Financial Conduct Authority and another agreement between Australia and Singapore allows for recognition, wrote ASIFMA.

Best Practice 7: Support industry-driven interoperability.

Regulators should support interoperability among the systems of all current market participants, which will lead to lower compliance costs and minimise potential disruption to the market.

Data standardisation and harmonised definitions could allow financial regulators to make efficiency improvements by allowing for the sharing of information in the market. For example, the International Technical Committee for Blockchain Standards  is currently working on developing international standards to support the roll-out of blockchain technology.

Best Practice 8: Provide a clear framework and guidelines to allow for cross-border transmission of data for processing and storage.

Digital data is core to Fintech and that data needs to be able to continue to cross borders for processing and storage. Allowing firms to utilise regional and global data centres as well as the cloud provides particular benefits to smaller firms and supports innovation. Smaller firms are able to access technology and innovations that would otherwise be out of their reach given the costs of investment and maintenance.

Best Practice 9: Ensure laws support technological developments.

ASIFMA recommends that governments review and update laws to ensure they allow for technological innovations to be introduced. Some regulations hinder the electronic distribution of certain products, limiting the ability of firms to utilise digital distribution channels. For example, if customers are required to bring physical identity documents into a location it slows down processes. National identity numbers or cards, as adopted by India, can allow for digital verification and more rapid digitisation. Voice biometrics can also be used to verify the identity of individuals.

Singapore

The Monetary Authority of Singapore is taking the regulation of Fintech seriously. The Merlion statue in Merlion Park, Singapore, via Wikipedia

Best Practice 10: Promote cybersecurity and data security in a globally interconnected financial system.

The future of Fintech and cybersecurity are also interlocked, as the advancements in Fintech have brought about new cybersecurity and data security risks. In order to help market participants navigate cybersecurity challenges and raise awareness of cybersecurity risks, several Asian market regulators such as Hong Kong, Singapore, India and Malaysia have developed, or are in the process of developing, cybersecurity frameworks and guidelines.

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