Thursday 23 February 2017 2:16 pm CFA Institute Talk

Regulators welcome fintech but aren’t sure what to do with it

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Regulators have a 'wait and see' attitude about regulating fintech.

Two governmental organisations recently released reports on regulatory approaches to fintech advances, including blockchain. First, the US Federal Reserve Board released its report on distributed ledger technology (i.e., blockchain) in payments, clearing, and settlement. Following that release, the European Supervisory Authorities (ESAs) — a joint committee of the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and European Securities and Markets Authority (ESMA) — published its conclusions on automation in financial advice.

Conclusions of the Fed and ESAs

The Fed concluded, broadly, that although distributed ledger technologies hold much promise, real-world applications are currently at a very early stage. Therefore, it is not obvious what regulation is needed at this stage because a lot will depend on the details of implementing blockchain.

For example, the Fed notes that there are numerous legal considerations involved in determining the legal basis of the components of a financial blockchain depending on what equivalent parts of the existing system they are replacing.

In its report, the ESAs concluded that no immediate action was required in addressing automation in financial advice because much of the relevant regulation was technologically agnostic and thus provided an adequate framework. An interesting point the report makes is that most respondents to the consultation argued that there would not be a wholesale move to fully automated services. Rather, respondents believe a hybrid model will grow in which automated advice is combined with access to a human adviser.

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Our view on this point, described in our comment letter on the original ESA consultation is informed by the results of our Fintech survey. The respondents to the survey suggested that automated financial advice was mostly targeted toward mass market retail investors for which there is currently an “advice gap”. Our respondents did not consider robo-advisers to be particularly attractive to high-net-worth (HNW) and ultra-net-worth (UHNW) clients. Interestingly, this distinction may be eroding because of some evidence that HNW and UHNW investors are increasingly attracted to automated advice.

Regulators welcome fintech, but…

There is a common thread between the two recent reports: Regulators welcome fintech but are not quite sure what to do with it. The reason for this sentiment is not because they don’t understand fintech, but because regulations are, for the most part, designed to achieve such goals as market integrity and investor protection.

These goals are technologically agnostic and existing regulations should by default encompass new entrants. Clearly, there will be exceptions to this, but these exceptions will typically be driven by the details of implementation. But because the implementation of fintech is at a far earlier stage than the hype surrounding fintech, there is not much for regulators to examine yet. The result is another set of regulators taking a “wait and see” approach.

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