Thursday, June 29, 2017

FSB explores FinTech financial stability implications, regulatory challenges

By Amy Leisinger, J.D.

The Financial Stability Board has issued a report discussing the potential financial stability implications of, and regulatory issues surrounding, technological innovation and the evolution of FinTech. The report identifies several key areas of focus for regulators, including management of operational and cyber risks and consistent monitoring of possible macro-financial risks. Given the small size of FinTech relative to the financial system as a whole, no substantial financial stability risks currently exist, but issues could quickly arise as the industry develops, the FSB notes.

In its report, the FSB identified several potential benefits associated with FinTech, including decentralization and increased intermediation by non-financial entities and enhanced efficiency, transparency, and competition. However, the report also notes a number of potential risks, including institution-specific financial and operations risks, such maturity and liquidity mismatches and governance control. Macro-financial risks to the financial system could also result from increased interconnectedness and dependence on third-party service providers, the FSB states. Although there are limitations on the availability of data as FinTech develops, regulators should take these benefits and risks into account when making assessments and setting up regulatory approaches, according to the report.

A majority of jurisdictions have already taken or plan to take action in response to FinTech, but financial stability is not often cited as an objective, the FSB notes. To adequately address stability concerns, international bodies and national regulators should consider whether current frameworks provide appropriate oversight for third-party service providers to financial institutions, including cloud computing firms and data service providers, to ensure IT safety and security, according to the FSB. In addition, the report stresses the need for additional efforts to mitigate cyber risks in the form of contingency plans for cyber-attacks, information-sharing resources, and ongoing monitoring to minimize the possibility of cyber events that could adversely affect financial stability. While, at present, there are no compelling signs of macro-financial risks directly connected with FinTech, experience shows that issues can emerge quickly if left unchecked, the report explains.

According to the FSB, regulators should be sufficiently agile to respond to rapid changes in FinTech and, to accomplish this, they should build staff expertise in the FinTech space and continue to improve communication with the private sector, as well as with one another. Innovations in the execution of cross-border transactions may raise issues regarding cross-jurisdictional regulatory compatibility, the report explains. In addition to monitoring developments in FinTech generally, the FSB stresses that authorities should also consider the potential effect of digital currencies on monetary policy and financial stability. Changes in business models and continuing evolution could have an impact on financial stability in ways that cannot be predicted at this stage, the FSB concludes.

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