Private sector innovation—whether it is fintech, biotechnology, the platformisation of the economy, or other developments—seems, over and over, to be catching regulators by surprise. Financial innovations are especially challenging. Finance deals in intangibles, which are essentially concepts, not physical objects. This makes financial innovation exceptionally dynamic, and almost infinitely variable. Today, fintech products and services regularly cross the increasingly arbitrary-looking regulatory boundaries that we drew in an earlier era around ‘banking’, or even around ‘finance’ as a whole. And they are evolving at a pace that makes it difficult even for experts to keep up.
Faced with a problem as changeable and fast-moving as fintech, how can regulators ‘future proof’ themselves?
It is time to acknowledge that private sector innovation is actually the single most profound challenge that regulation confronts. And, it is like water in its corrosive, undermining, persistent effects. The orienting question in any such decision-making environment should be, ‘how is private sector innovation, in this case fintech, undermining my assumptions, changing relationships, denaturing products and markets, and seeping around regulatory definitions and boundaries, right now?’
My recent paper, ‘A Regulatory Roadmap for Financial Innovation’ aims to set out a systematic approach for regulators grappling with fintech innovation. It is oriented around four basic questions. First, what does the regulator know about fintech in its sector, and how does it know it? What does it not know? Second, how is regulation structured with regard to fintech, and what flows from these design choices? Third, what mechanisms are in place within the regulator to make it adaptable, resilient, and capable of learning through monitoring and experience? And finally, what strategic choices are available to the regulator in thinking about how to frame and interpret a particular fintech innovation?
Each of these is actually a bit involved. The roadmap addresses them in somewhat greater detail (the roadmap is based on Chapter 9 of Cristie Ford, Innovation and the State: Finance, Regulation, and Justice (CUP 2017)). Working out what a regulator knows and does not know, for example, involves considering who is innovating, in what context, for what purpose, and more—as well as examining the sources and quality of the information the regulator is relying on to answer each of these. Consider also two aspects of regulatory design that are especially relevant when dealing with fintech: the boundaries of regulatory jurisdiction, and the assumptions that are built into the regulatory regime.
Regulatory boundaries delineate jurisdiction. But they also impose deeper, cognitive and epistemological, limitations that a fintech-oriented regulator should be aware of. Regulatory boundaries quite literally affect what a regulator can see, and not see. Thriving at the boundaries of different regulatory zones may be products that seem to be neither fish nor fowl, and therefore that raise challenges around comprehensibility and regulatability. Bear in mind that these products may be perfectly ‘legible’ to the market, and could grow in use and significance, even while they remain illegible to the regulatory structures that should be overseeing them. Swaps were in this liminal place once, and other products and services are in the borderlands now.
Panning further out, fintech as a whole, almost by definition, straddles the realms of financial and non-financial business. The fact that bigtech companies are not regulated as banks or financial institutions, for example, means that we may not appreciate how much essentially financial business they are already actually doing. On the other side of the coin, the fact that financial regulation is focused (of course!) on finance makes it harder to see financial institutions’ businesses as implicating other, non-financial regulatory concerns. Consider the fact that global financial institutions, which sit on a treasure trove of data about their depositors, consumers, and investors, are poised to be significant players in an informational market that raises significant concerns about privacy, surveillance, and even human dignity. These are not problems that financial regulators have typically had to confront. Jurisdictional and cognitive blinders could leave them hiding in plain sight.
Regulatory assumptions also play a prominent role in genuinely new contexts, where a regulator cannot rely on past experience to make sense of unfamiliar phenomena. A financial regulator will want to check regularly that its assumptions remain sound and in particular, that it is not swayed by self-serving industry perspectives or by the sense that innovation will, somehow, inevitably turn out to be socially beneficial. Each of these assumptions was present among key regulators in the run-up to the 2008 financial crisis. In the result, regulators effectively ceded the field to industry actors, with profoundly damaging effects on the global financial system. What assumptions, then, are regulators making about fintech?
Regulation matters. It constructs markets, influences behaviour, and provokes innovation in both intentional and unintentional ways. Financial regulation in particular can be the site of some of the most pernicious effects of power and domination, as well as some inspiring avenues for enhancing human flourishing. If financial regulators are to make sense of both the promise and the risks associated with fintech, they will need a strategy, and the tools to function well under conditions of ongoing change and uncertainty.
Cristie Ford is Professor of Law and Associate Dean, both at the Peter A. Allard School of Law at the University of British Columbia.