Fintech could cause the next financial crisis if it isn't regulated better, says a risk management consultancy

 
Lucy White
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Incumbent banks and fintech firms need to be placed on a more equal footing, Parker Fitzgerald argued (Source: Getty)

Fintech has the potential to cause the next financial crisis if regulation isn't harmonised and coordinated across industries, a risk management consultancy has warned.

The banking sector is at an inflection point, according to Parker Fitzgerald Group's report released today, as it stands on the brink of a "fundamental and rapid digital transformation".

It said the adoption of digital technology in banking is widening the gap between businesses' aspirations and the operational reality, since the new "digital landscape" is often incompatible with banks' legacy systems, and the rise of non-bank fintech players is moving services out of the reach of regulators.

Read more: Bank spending on consultants jumps as fintech challenge and regulation keep lenders on their toes

"It is not inconceivable that the next financial crisis may emerge from the technology sector. This calls for a harmonisation of technology standards and a greater regulatory coordination across industries to safeguard financial stability," said Parker Fitzgerald's chief executive Scott Vincent.

"As operating models are re-imagined, this will open up new opportunities. But the mechanisms through which risks emerge, intensify and spread will lead to new non-financial risks, particularly around cyber-attacks and threats to customer data privacy and security."

Parker Fitzgerald's report points out that more and more regulations have been layered over old rules, which may leave loopholes or vulnerabilities for banks.

Read more: Bank of England governor Mark Carney warns fintech's democratic revolution poses risk to financial system

For example, the second Payment Services Directive (PSD2) will come into force in January, which requires banks to open up their customers' data, with consent, to third party partners. Meanwhile the General Data Protection Regulation, also due next year, could impose an "eye-watering" fine of up to four per cent of firms’ global revenue if they get this wrong.

According to data from Accenture, financial institutions spent $6.4bn (£4.8bn) on data-related programmes in 2015. This is expected to hit $16bn by 2019.

The report adds that the increased regulation placed on incumbent banks since the financial crisis has helped to achieve financial stability, but has distracted banks from pursuing new avenues of growth.

While new fintech players have moved in, the banking industry's revenue growth has dropped below three per cent – half the rate registered between 2010 and 2015.

"The impact of subdued financial performance is not only on shareholders and markets, but also on end-users – the corporate and retail clients who rely on access to a wide array of banking services which support activity in the wider economy," said the Parker Fitzgerald report.

Data, analytics, artificial intelligence, the cloud and blockchain will be key areas to focus on in the future, it added.

Read more: Why a red tape bonfire won’t help fintech: The FCA's Christopher Woolard talks to City A.M. about regulation testing

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