Fintechs warned to expect tougher regulation
BoE’s Carney says disruptive technology could signal end to traditional bank model
The governor of the Bank of England has put banks and fintech companies on notice to expect tougher, more intrusive regulation as the use of disruptive technology in financial services becomes more sophisticated and widespread.
Mark Carney, who is also chairman of the Financial Stability Board that makes recommendations to G20 nations, said on Wednesday that fintech could signal an end to the traditional universal bank model. He added that it could also increase “herding” risks and make the system more interconnected and complex.
“As those risks emerge, authorities can be expected to pursue a more intense focus on the regulatory perimeter, more dynamic settings of prudential requirements, a broader commitment to resolution regimes, and a more disciplined management of operational and cyber risks,” he told an audience in Wiesbaden, Germany.
The Basel-based FSB is already scrutinising what risks and rewards fintech might present, and what regulators should do about it. It will report to the G20 in July.
Mr Carney pushed London as the “world’s leading fintech centre”, a remark that will not go unnoticed among his audience. German regulators are preparing to meet as many as 20 foreign banks next week to explain how to move some of their operations to Frankfurt in the wake of the UK’s Brexit referendum, according to a Reuters report earlier on Wednesday.
The BoE has embraced fintech innovation under Mr Carney. It has even recognised how the technology behind bitcoin might improve central banking services, and is at the early stages of examining a digital currency.
Mr Carney said on Wednesday that the burgeoning peer-to-peer lending sector, which in the UK now represents about 14 per cent of new lending to small businesses, “does not, for now, appear to pose material systemic risks”.
This sentiment runs against comments made last year by Adair Turner, the former chairman of the now-defunct Financial Services Authority and a former contender for the job that Mr Carney now holds. Lord Turner said last year that P2P loans could be the source of losses that would “make the worst bankers look like absolute lending geniuses”.
Earlier on Wednesday, Bundesbank president Jens Weidmann, who is also involved in the FSB, echoed the views of his Bank of England counterpart, saying that while enhancements in financial technology could bring banking services to more people, they could also “exacerbate financial volatility”.
Mr Weidmann also warned on the threat of cyber crime, saying that the more markets relied on digital technology “the more vulnerable the interconnected global financial system becomes to a cyber attack”.
Both Mr Carney and the Bundesbank president warned that there were risks emanating from the use of so-called robo-advice, where algorithms are used to manage risk.
The Bank of England governor said this could lead to excess volatility from “herding”, particularly if the underlying algorithms proved overly sensitive to price movements or all worked a similar way.