The following represents the personal opinion of James Callon, an experienced, now retired regulator with over 40 years of Canadian and international regulatory experience.
- Lessons learned:
One key lesson learned from the 2007 / 2008 financial crisis is that it was a normal consumer product/ service combined with lax regulatory oversight causes and unethical conduct by financials services providers caused irreparable harm to the consumers, to the economy and to the integrity of the financial sector.
The very basic duty and public expectation of a government and consumer protection regulators are to protect the public’s interest first and in an effective and comprehensive manner; to keep the public safe with the consequential impact of strengthening financial stability of the economy.
Any government or regulator should understand its primary role is to protect the public interests therefore they must be apprehensive to decease the level of protection for consumers, or on the other hand, not respond to systemic increases in risks caused by FinTech in terms of their integration into the financial system.
Clearly if government wishes to make substantial compromises to FinTechs, then this should be the prerogative of the government to make a decision, not for a regulator and the government should be held liable and accountable for systemic failure like Wirecard and many other fintechs including many crypto currency scandals.
It would be nice for someone to keep a score card as to the losses suffer from failed Fintech companies and who suffered the losses.
- Anticipating Increased Consumer Risks from Fintechs:
The financial sector would likely see an increase in the level of consumer risks in line with the expanding number of unregulated / inexperienced FinTech providers that wish to gain broad access to millions of financial consumers.
Aside from the standard financial consumer risks previously noted and that would apply to FinTechs, one must focus attention on potential increases in technology based risks. The FinTechs’ key pillars to deliver financial products and services relies on innovative, and / or customized software, hardware technology and access to the internet.
Given the obvious reliance on technology and custom software, regulators must be concerned about the technologically based risks to the financial sector. FinTechs are becoming more and more entwined and interconnected with the traditional financial industry. The new players are likely less sophisticated / experienced in the financial sector which will increase the probability of risks events. Furthermore, regulators will be seeing the introduction of a range of software developed in-house by each Fintech which raises the increased probability of software failures caused by programming errors, weak security, internal manipulation of coding; opportunity for fraudulent access, etc. There may also be are additional concerns as to the quality of hardware and related system failures and therefore the quality of any redundancy.
- Ability to Repair Systemic Harm:
Technology based errors in consumer products and services often creates immediate and systemic harm.
With established banks, regulators may not have the capacity to supervise / test complex technology so they have taken a risk-based approach by requiring Banks to develop and apply proper IT governance including risk mitigation, security, backups, testing and a quality control framework over the use of technology, etc. Despite these risk mitigation methods, banks still experience significant faults over time in their software applications, updates and migration. These types of errors are normally systemic when they occur as millions of consumers can be affected at the same time; sometimes errors have occurred over a long period time before being detected. Such technology-based errors have resulted in significant costs to consumers and then to financial institutions that are required to provide re-imbursement and possible compensation in addition to generating costs due to litigation. With regulated institutions, regulators have put in place the assurance that there are sufficient retained earnings / capital to be able to cover these operational risks.
FinTechs are asking for entry to the financial world in order to provide products and services to thousands / millions of customers. However, it is unclear if FinTechs will be able to provide the same level of financial strength to respond to harm done by their services. The public and regulators must have the same level of comfort in knowing whether a FinTech companies has the financial capacity to rectify harm done by their errors (risks) whether by carelessness or other means and to also deal with possible litigation without going bankrupt and closing their doors. Putting on adequate capital requirements / reserves based on product offerings and the level of market place risks created would provide some assurance to the stability of the sector and the confidence by consumers. Fintechs may oppose such requirements given the costs of having reserve capital which smaller companies cannot afford and instead prefer to transfer the risks on consumers.
