A multinational regulatory advisory group concluded today that the rapid growth in financial technology (fintech) currently poses little threat to financial stability, although it recommended areas that warranted closer international collaboration.
The Financial Stability Board, which brings together senior policy makers from the G20 and other key financial centres such as Hong Kong and Singapore, published a report on Tuesday recommending closer international scrutiny of the fintech sector.
No compelling risks
Although it said "there are currently no compelling financial stability risks from emerging fintech innovations", the Board acknowledged the sector had developed so rapidly, it had yet to be tested through a full financial cycle.
"Policy makers should continue to assess the adequacy of their regulatory frameworks as adoption of fintech increases, with the objective of harnessing the benefits while mitigating risks," the report said.
It identified 10 areas that required attention, three of which were seen as priorities for international collaboration.
· Managing operational risks from third-party service providers
· Increasing cyber-security following recent attacks on technology services
· Monitoring for any macrofinancial risks posed by the rapid increase of fintech
Growth of financial utilities
After nursing expensive legacy IT frameworks through years of costly upgrades, the financial industry has become increasingly taken with fintech innovations that allow them to carry out repetitive middle and back office functions through third-party service providers.
These so-called financial utilities help save costs and provide access to ever-greater amounts of useful data – not only on customers, but also on how their operations are most efficiently carried out.
Although there have been few cases where hackers, or operational mistakes at financial utilities have led to losses for the banking industry, authorities are concerned that the disconnect between the banks and services carried out by third parties could create areas of stress.
"We're so tightly coupled to our clients' businesses, I don't see anyone taking their eye off us, I see further scrutiny over time," said Joseph Turso vice president of product marketing at SmartStream RDU.
Indeed, fintech providers believe they are supplying exactly what the regulators want: transparency and accountability.
"We remove a lot of the risk in the market place in terms of counterparty risk," said Phil Simons at Eurex Clearing. "But we do need to avoid any form of excessive concentration risk among a small number of very large players."
The FSB report also suggested the regulatory approach to financial services would have to change over time to respond to the rapid pace of change in fintech services.
Much would depend, the report said, on "whether current regulatory frameworks cover relevant emerging risks".
For now, the FSB said, it was mostly concerned that the fintech industry complied with rules governing consumer and investor protection, market integrity and promoting innovation and competition.