3. Case 2. Digitalisation in finance: regulatory challenges and regulatory approaches

Miguel Amaral

Technology-driven innovations in the financial sector, which are usually brought together under the label “Fintech”, are rapidly transforming the way financial markets are operating. This global phenomenon is disrupting various aspects of the financial landscape and challenging the way governments regulate.

It must be noted at the outset that, although Fintech developments raise numerous concerns that need to be addressed, many of them are not fundamentally new in themselves. Digital innovation in the financial sector dates indeed back from the 1960s with the development of credit cards and cash dispensing machines (followed by the introduction of telephone banking in the 1980s). A fundamental differentiating factor lies however in the sheer pace and the scope of financial markets innovations, which bring radical changes in traditional markets and, in turn, creates disruption in the way governments traditionally regulate these activities. Comprehending the changes underway is critical to better align policies with the many opportunities and challenges brought by innovations in this sector.

To set the scene, the following developments provide some insights on what Fintech is about, the most notable digital technologies used, and the main applications of digital technologies in financial markets.

As highlighted by (OECD, 2018[1]), several definitions of the term “Fintech” can be found in the literature on the topic, including:

  • New entrants that promised to rapidly reshape how financial products were structured, provisioned and consumed (World Economic Forum, 2017[2]);

  • Variety of innovative business models and emerging technologies that have the potential to transform the financial services industry (International Organisation of Securities Commission, 2017[3]);

  • Technologically enabled financial innovation. It is giving rise to new business models, applications, processes and products. These could have a material effect on financial markets and institutions and the provision of financial services(International Association of Insurance Supervisors, 2016[4]).

Nonetheless, none of these definitions fully captures the diversity of financial innovations enabled by digital technologies for two main reasons:

  • Technology-driven innovations in financial markets cannot be restricted to start-ups that develop new financial services, as it is often the case. Such approaches would indeed exclude major market players in the sector that also rely on technological advances to offer new or differentiated products or services;

  • A clear distinction needs to be made between the underlying technology and its (innovative) application. Focusing of the technology alone leaves aside the development of new business models relying on standard technologies (e.g. peer-to-peer lending, digital payments, e-trading). Likewise, Fintech should not be reduced to innovation in financial services. Such approach would not recognise key technological innovations for standard services such as the use of biometric technologies to improve transactions’ security.

This definition challenge raises might raise different concerns, including:

  • The fact that government agencies may face an overlapping (hence confusing) range of concepts, affecting potentially the quality of their rule-making activities;

  • The difficulty to find relevant metrics to capture the pace and extent of the digital transformation in the sector;

  • The fact that jurisdictions might come forward with different legal definitions, affecting the quality of regulatory co-operation.

A way to deal with this drawback is to make a distinction between the technology and its (innovative) application. While potential applications of digital technologies in the financial sector are numerous and span across various areas such as insurance, lending, payments, financial advices and investments (OECD, 2018[1]), the main technologies used in financial services can be gathered in four broad categories:

  • Distributed Ledger Technologies (DLTs): DLTs have first emerged as the technology behind crypto-currencies but they now have wider applications such as smart contracts. These new technologies offer multiple original ways to develop financial transactions, including trading or insurance payouts;

  • Big Data and AI: the breath-taking surge in the volume and variety of data offer a number of opportunities to improve the efficiency of financial markets. Big data-driven analysis has for example been used to develop personalised and innovative services to customers. It offers indeed avenues to get more accurate information on customers’ risk profiles or willingness to pay. This relies on existing and new data governance and sharing frameworks that enable exchange of data between public and private sectors; or between private entities at national and/or international levels. Companies may also harness big data to develop better trading activities and improve the detection of illicit activities;

  • Digital Identity and biometric technologies: the integration of digital identity solutions (public and private) and biometric technologies (e.g. facial recognition) in the financial sector is quite often used to enhance the security of transactions;

  • Internet of Things: connected devices are proliferating and the amount of data on consumers’ behaviors is increasing sharply as a result. This information can for example be used by insurers to better target consumer profiles.

The development of digital technologies in the financial sector brings a number of structural changes on both the production processes and the consumption systems. These transformative changes should be properly understood to help governments navigate the regulatory challenges and target the appropriate regulatory response. The developments below offer a short description of some of the key impacts (for a more detailed and comprehensive presentation of the implications of Fintech developments, see (OECD, 2018[1])).

The technological innovation in financial markets is affecting many aspects of the standard intermediation processes, leading to the emergence of new business models. A canonical example where digitalisation brings disruptive changes to intermediation relates to lending services. Technological advances have indeed enabled the recent development of new forms or financial intermediation connecting directly lenders (individuals, businesses or institutions) and borrowers (either individuals or businesses) via lending-based crowdfunding platforms (OECD, 2018[5]). Peer-to-peer lending has grown at an extraordinary rate in recent years, notably in the United Kingdom and the United States. Some argue that it offers great opportunities to make financial intermediation more transparent, stable and efficient, even holding the potential to bring an alternative to the traditional banking model.

The development of blockchain in finance also challenges all existing intermediaries, potentially proposing a completely alternative way of organising and enforcing transactions in financial markets. In the case of virtual currencies, the anonymous, decentralised nature of transactions presents a particularly difficult challenge for regulators, as regard enforcement in particular.

Robo-advisers provide new forms of intermediation as well. It can make financial planning accessible without the need to rely on a financial advisor and as such, this technological application removes a level of intermediation.

The development of Fintech bears important consequences in terms of competition dynamics. While, for different reasons (e.g. stronger reputation, better brand recognition, easier access to capital markets), traditional markets players such as banks hold considerable competitive advantage, they also face an increasing competitive pressure from new intermediaries (OECD, 2020[6]). Digital technologies may indeed help to lower the barriers to entry and allow new entrants gain markets shares. It offers avenues to decrease infrastructure costs, which help new entrants to quickly reach out the efficient scale to develop new product or services. In addition, new entrants may harness the opportunities offered by new technologies to offer less expensive, more agile, more market responsive and more tailored services to consumers. Firms such as Monzo, Wise, Stripe or HiFX have for example quickly take market shares away from traditional financial institutions by offering low or no transaction charges for local and international payments. It is worth noting that, beyond the fact that digitalisation in finance increase the contestability in existing markets, it also creates avenues for market extension. It may for example ease the access to financial services (e.g. credit, investment) for underserved citizens or businesses.

These evolutions raise a need to examine which regulations are necessary, particularly in light of their impacts on competition, whether intended or unintended. It must be underlined that, over the past few years, traditional financial institutions have been faced with increasing regulatory scrutiny, which may have undermined innovation. The disruption brought by Fintech firms raises a critical need to review these regulations with the view of assessing whether the regulatory landscape remains fit-for-purpose. A noted by (OECD, 2020[6]),”it is clear that regulation will influence the type of competition between incumbents and entrants. A main issue is whether regulation should aim at a level playing field or whether it should favour entrants in order to promote competition”.

Digitalisation in finance holds the potential to increase markets efficiencies along different avenues:

  • Digitalisation can make financial markets work more efficiently by reducing transaction costs and information asymmetries. A number of markets imperfections lies indeed in information incompleteness on the quality of the financial product or services. The use of digital technologies in the financial sector might help improve transparency and allow economic agents to manage their personal data more efficiently, ultimately strengthening their bargaining power;

  • It may foster the access to financial services for small and medium-sized enterprises (SMEs);

  • It may offer more convenient, faster, secure and cheaper transactions;

  • Through the use of big data, digitalisation may support the development of more tailored product or services and support fraud detection;

  • It may help manage uncertainties in financial markets by promoting the diversification of portfolios.

Digital technologies have greatly increased the levels in the generation, collection, storage, sharing and use of personal data, including data collected through mobile devices.

Although the development of big data and the associated development of AI-embedded products or services can lead to positive outcomes in the financial sector, it also raises a number of data privacy and security issues. These concerns are not fundamentally new but the unprecedented amount of data made available by digital technologies and the evolving uses of technologies in the financial sector is substantially changing the scale and scope of data privacy challenges but (OECD, 2019[7]). As noted by (OECD, 2018[1]), “this may be particularly relevant for client-facing applications using customer data, and new devices, including those connected to the “Internet of Things.” Indeed, a number of recent incidents have involved fraud and theft through mobile banking apps, and there have been breaches of personally identifiable information, particularly as a large number of mobile devices lack anti-virus software”. Beyond the sensitive personal and financial information collected by Fintech firms, some businesses are starting to harness alternative information such as social media patterns and online spending behaviours. These practices might entail new risks for financial consumers, such as the excessive use of digital profiling to unduly exclude some consumers.

If poorly designed, regulation can be a significant barrier to entry for new services in financial markets. At the same time, governments need to limit any potential unintended negative consequences of these innovations. The risks raised by technology-driven innovations in financial services include for example:

  • Misuse of data;

  • Inadequate disclosure and redress mechanisms;

  • Lack of security;

  • Misuse of new services by uninformed consumers;

  • Increased risk-taking by investors (an interesting analysis on the topic is provided by (Kalda et al., 2021[8]) who find, in particular, that “that smartphones increase purchasing of riskier and lottery-type assets and chasing past returns. After the adoption of smartphones, investors do not substitute trades across platforms and buy also riskier, lottery-type, and hot investments on other platforms”).

Governments are therefore confronted with a fundamental dilemma: how to maintain a balance between fostering innovation and protecting consumers against the potential unintended consequences of disruption brought by Fintech innovations? An essential step to overcome this issue is to identify the nature of the governance and regulatory policy challenges for governments. Given the wide range of applications of digital technologies in financial services, a comprehensive analysis of the regulatory challenges brought by Fintech goes beyond the scope of this paper. The following developments aim merely to illustrate the nature of these questions, focusing on specific applications such as robo-advisors or crowdfunding platforms.

As for other sectors, the Fintech developments might create a pacing problem (Marchant, 2011[9]) due to the fact that regulatory frameworks might lack the agility to accommodate the resulting changes in due course. While this disconnect between the pace of technology and the pace of regulation has always been a concern, there is a growing consensus that the sheer pace of recent product and market innovations in the financial sector is particularly challenging.

Two interrelated reasons might explain why governments struggle to keep pace with changes arising from these innovations.

  • The degree of technical complexity associated with a number of innovations in the sector;

  • The astonishing pace at which FinTech can grow.

As illustrated by online payments, which encompass a range of sectors from online banking, electronic commerce (e.g. Amazon) to payment services (e.g. PayPal), the rise of digital-driven innovation in the financial sector is blurring the boundaries across sectors and layers of the traditional value chain. It raises strong challenges for the existing regulatory frameworks as the traditional regulations are often designed on an issue-by-issue, sector-by-sector, technology-by-technology basis and, as such, they may not fit well with Fintech. The inadequacy of regulatory frameworks bears a number of negative consequences, including:

  • Legal uncertainties and added compliance costs that may curb innovation and lower incentives to enter new markets, particularly for small businesses that do not have sufficient resources to offset the higher costs;

  • Risk management failures (see above).

The development of technology-based financial advices (also known as ‘robo-advices’ or ‘automated advices’), which are rapidly emerging across countries as an alternative to traditional advice paradigms in financial markets, offers an illustration to these concerns. The main objective of this application is to offer lower-cost investments recommendations, relying heavily on automation and artificial intelligence (AI). The expected benefits are twofold:

  • Reducing information costs and the time consuming activities developed by standard financial advisors;

  • Harnessing AI and automation to increase objectivity, consistency and transparency to overcome potential behavioural bias in the recommended investment.

One of the reason why robo-advisors challenge existing regulatory frameworks lies in the fact that they are not sector specific. This innovation span indeed different areas, from the banking sector, the insurance sector to the securities sector. This creates situations where the regulatory frameworks might be unclear, overlapping or inconsistent across sectors. In 2015, the three European Supervisory Authorities have issued a joint discussion paper to assess the potential benefits and risks of technology-based financial advices, with a view to determine if any regulatory action is needed to mitigate the potential risks (e.g. possibility that consumers could misunderstand financial advices provided) while harnessing the potential benefits (European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority, 2015[10]). The joint Committee notes, in particular, that “as is often the case with financial innovation topics, the phenomenon of automation in financial advice has emerged against a background of a lack of clarity in the existing legislative framework and inconsistent regulatory treatment across the three sectors”.1

An associated challenge for policy makers is to determine to what extent robo-advisors actually provide financial advices and how the existing regulation of financial advices applies. As highlighted by (OECD, 2016[11]), regulatory frameworks usually state that financial advices have to be tailored to individual specific characteristics (i.e. not providing a general recommendation only). In response, claims have been made that the financial advices provided via robo-advisors should be understood as a general recommendation and not a personalised one. This discrepancy illustrates the need for a careful review of existing regulations as well as a definition of the personal details that should be taken into account to provide the financial advice (OECD, 2018[1]).

The development of crowdfunding platforms also challenges the existing regulatory frameworks and brings new questions for governments. Among others, a key issue to be considered is whether crowdfunding platforms should be allowed to perform the same functions as banks and how regulation could influence this scenario. This question confronts governments with a dilemma: as noted by (OECD, 2018[1]), “restricting crowdfunding platforms to simple credit intermediaries limits their risks, but it also prevents them from experimenting with different business models that could allow them to perform the same functions as banks but with a less fragile business model”.

An important trend that bears important consequences in financial markets is the development of AI-embedded products or services. Combination of big data and AI techniques is for example routinely used to make financial decisions, through technologically-based financial advices for example.

The development of AI in financial services is not immune to the general challenges brought by the use of algorithms in terms of consumer protection. There is indeed chances that the underlying algorithms fail to perform, either due to biases (intentional or unintentional) or to coding errors. Against this background, a key challenge faced by governments lies in the difficulty to assign liability: who should be liable for the damages caused by AI such as a bad investment choice resulting from AI-based automated decision-making processes? Who shall compensate for the economic losses incurred by Fintech customers in case of damage? It is worth underlining that issues around the identification of liability and the prevention of risks when a third party component is involved components are not fundamentally new. However, the fact that AI-embedded services become increasingly autonomous and self-learning poses new governance and regulatory challenges to define appropriate protection and ensure legal certainty, both for Fintech firms and their consumers.

In the case of robo-advisors in particular, a careful review of existing regulatory frameworks might also be needed as, in most cases, existing regulatory frameworks for financial advices do not address the need for auditing and stress testing of the advice provided. The liability issues are also particularly strong with the use of Distributed Ledger Technologies in finance. This technology departs indeed from standard liability regimes, making it difficult for policymakers to enforce existing legal frameworks.

Digitalisation in finance may also facilitate the development of outright fraudulent activities and law avoidance, leaving potentially governments with a regulatory vacuum. Money laundering is one example that can be facilitated by the complex flows of data and the possibility to use technological developments such as the Distributed Ledger Technology to hide certain transactions.

In most cases, digital innovation in financial services pays no regard to national or jurisdictional boundaries. This may allow innovative firms to “forum shop” when it comes to their physical presence, their internal tax policy, and their policy for data protection or other regulated areas. Beyond this potential for regulatory arbitrage, the mismatch between the transboundary nature of digital innovation and the fragmentation of regulatory frameworks across jurisdictions may undermine the spread of beneficial Fintech developments and generate failures in risk management. The regulation of crowdfunding platforms provides an illustration of the differences in approaches across countries. As noted by (European Commission, 2017[12]) in particular, “European crowdfunding sector is characterised by its highly heterogeneous nature, shaped by the different starting points of nascent national crowdfunding sectors across the EU, and largely determined by the incumbent regulatory frameworks as they pertain to crowdfunding as a novel form of technologically mediated market exchange”.

Without any claim to be exhaustive, the developments in this section shed light on some interesting initiatives that have been implemented across countries to deal with these regulatory challenges, focusing on specific applications such as robo-advisors or crowdfunding platforms (for a thorough analysis of the regulatory approaches to the tokenisation of assets, see (OECD, 2020[13])).

Several governments have developed guidance to help reduce uncertainty about the regulatory implications Fintech developments. Examples include the regulatory guide published by the Australian Securities & Investment Commission (ASIC) in 2016 on the use of technology-based advice (Australian Securities & Investment Commission, 2016[14]), stating in particular that the regulatory requirements for technology-based advisors are the same as those for traditional models. It provides additional guidance on the obligation to:

  • Establish and maintain adequate risk management systems;

  • Have adequate financial, technological and human resources to provide the financial services;

  • Regularly monitor and test the algorithms that underpin the advice.

As regard technology-based financial advices, the New Zealand Ministry of Business, Innovation and Employment took actions in 2016 to broaden the definition of advice in order to accommodate automated advisors (New Zealand Ministry of Business, Innovation and Employment, 2016[15]). In 2016, the US Securities Exchange Commission (SEC) approved a rule change suggested by the Financial Industry Regulatory Authority (FINRA) to require registration as securities traders of algorithmic trading developers (Securities and Exchange Commission, 2016[16]).

As for crowdfunding platforms, (OECD, 2018[5]) conducted a review on regulatory practices in 17 OECD countries (Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Israel, Italy, Mexico, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, Sweden and the UK). The report highlights, in particular, that:

  • A number of countries have adopted ad hoc regulatory approaches to deal with this new mode of financial intermediation (e.g. France, the UK and Israel);

  • Other countries have introduced regulation that either applies to both lending-based and investment-based crowdfunding or appears to not make a difference between the two models (e.g. Austria, Belgium, Finland, Mexico, Portugal);

  • In countries that do not have a specific regulation, crowdfunding platforms need to adapt to existing regulations on securities trading, banking or payment institutions.

Some jurisdictions are experimenting innovative regulatory approaches to support testing and trialling new technologies in the financial sector. Approaches that have recently drawn the attention of governments include innovation offices or regulatory sandboxes (see Box 3.1).

Several jurisdictions have implemented innovation offices to promote the development of innovation in financial services. An example is the Estonian Financial Supervision Authority (EFSA), which offers interpretations on relevant regulations applying to a proposed innovation and provides licensing guidance (Estonian Financial Services Authority, 2018[18]).

While, in practice, innovation offices might come in many different forms, a common objective is to strengthen the engagement with innovators and foster policy learning. It offers avenues to anticipate concerns early on and address them through collaborative processes with businesses. The key potential benefits are the following:

  • As illustrated by recent initiatives from the Netherlands Authority for the Financial Markets (AFM) or the UK Financial Conduct Authority’s (FCA) Innovation Hub, governments may rely on the information gathered trough the information offices to flesh out the evidence base for regulatory reform. They may help governments identify where the regulatory landscape is unclear, incomplete, overlapping or redundant and, as such, contribute to improve policy making;

  • Innovation offices may reduce regulatory uncertainty for innovators and, in turn, lower compliance costs. As noted by the U.S. Government Accountability Office (Government Accountability Office, 2018[19]), “the cost of researching applicable laws and regulations can be particularly significant for FinTech firms that begin as technology start-ups with small staffs and limited venture capital funding. FinTech start-up businesses told us that navigating this regulatory complexity can result in some firms delaying the launch of innovative products and services – or not launching them in the United States – because the FinTech firms are worried about regulatory interpretation”;

  • Innovation offices may also help improve consumer protection, by ensuring an early identification of the potential risks raised by Fintech developments;

  • They also bring the potential to stimulate competition in financial markets by decreasing regulatory barriers to entry and the regulatory uncertainty for innovators. This, in turn, can result in lower prices for consumers. The large number of firms engaging with governments through innovation offices across the world gives an indication that it may indeed favour market entry. As indicated by (UNSGSA and CCAF, 2019[20]), “the joint AFM/DNB Innovation Hub in the Netherlands has provided regulatory clarification to around 600 firms (De Nederlandsche Bank, 2016[21]) while the MAS Financial Technology and Innovation Group (FTIG) has engaged with more than 500 companies from Singapore and overseas. In the U.S., the Bureau of Consumer Financial Protection (BCFP) estimates that it engages with over 100 innovative firms per month through a combination of office hours and other engagements. Another regulator, the Commodity Futures Trading Commission, met with more than 200 innovative firms during the first year its innovation office was in existence (Forbes, 2018[22])”.

Regulatory sandboxes were pioneered by the UK’s Financial Conduct Authority (FCA) and, since then, numerous initiatives have emerged in the financial sector, across OECD countries and beyond (Attrey, Lesher and Lomax, 2020[17]). (UNSGSA and CCAF, 2019[20]) reports that regulatory sandboxes for financial services are now planned or live in over 50 jurisdictions.

The following developments offer details on some regulatory sandboxes implemented across jurisdictions:

  • United Kingdom’s Financial Conduct Authority (FCA): in 2015, the Financial Conduct Authority launched a new program on regulatory sandboxes to allow businesses, small or large, to test new ideas in the market with real consumers (Financial Conduct Authority, 2015[23]). The objectives of the sandbox are to provide firms with:

    • The ability to test products and services in a controlled environment;

    • Reduced time-to-market at potentially lower cost;

    • Support in identifying appropriate consumer protection safeguards to build into new products and services;

    • Better access to finance.

    Since its launch, 118 firms have been accepted to test innovative products, services, business models and delivery mechanisms. In its 2017 report (Financial Conduct Authority, 2017[24]) on how on the initiative met its objectives over the first year, the FCA states the following:

    • Access to the regulatory expertise the sandbox offers has reduced the time and cost of getting innovative ideas to market”;

    • Testing in the sandbox has helped facilitate access to finance for innovators

    • The sandbox has allowed [the FCA] to work with innovators to build appropriate consumer protection safeguards into new products and services

  • Monetary Authority of Singapore: in 2016, the Monetary Authority of Singapore (MAS) launched the “FinTech Regulatory Sandbox” to encourage more experimentation in financial services. Any interested business can apply to experiment new ideas through the sandbox. Depending on the nature of the innovation, the MAS may relax specific regulatory requirements for the duration of the sandbox (Monetary Authority of Singapore, 2016[25]). The sandbox may not be available in two specific circumstances (Monetary Authority of Singapore, 2016[25]):

    • The proposed financial service is similar to those that are already being offered in Singapore, unless the applicant can show that either a different technology is being applied or the same technology is being applied differently”;

    • The applicant has not demonstrated that it has done its due diligence, including testing the proposed financial service in a laboratory environment and knowing the legal and regulatory requirements for deploying the proposed financial service”.

  • Abu Dhabi Global Market (ADGM): the ADGM is hosting a FinTech Digital Lab’s to allow financial institutions and FinTech firms to collaborate, experiment and develop innovative services, with a participation from ADGM’s Financial Services Regulatory Authority (FSRA).

  • Financial Superintendence of Colombia (Superfinanciera), Ministry of Finance and Public Credit: in 2018 Colombia’s Superfinanciera launched a regulatory sandbox (“La Arenera”) to facilitate innovation in the financial sector. As noted by (Attrey, Lesher and Lomax, 2020[17]), one of the objectives is also to “contribute to financial inclusion mechanisms by promoting business models for payment and remittance services as well as finance management services for individuals and small and medium enterprises”.

  • Hong Kong Monetary Authority (HKMA): in 2016 the HKMA launched its “Fintech Supervisor Sandbox” (FSS) to allow allows banks and their partnering technology firms to test innovative products without the need to achieve full compliance with the HKMA's requirements. (Hong Kong Monetary Authority, 2020[26]) reports that “as of end-2020, a total of 193 pilot trials of fintech initiatives had been allowed in the FSS since its launch in 2016, compared with 103 as of end-2019. As of end-2020, the HKMA had also received in total 533 requests to access the FSS Chatroom for supervisory feedback at the early stage of fintech projects since the introduction of Chatroom in 2017. Around 70% of the requests were made by technology firms”.

  • Reserve Bank of India (RBI): with the view of developing financial services in India, the RBI launched an inter-regulatory working group in 2016 to review the existing regulatory framework. The group released a report on 2018 for public consultation, which advocates the introduction of a regulatory sandbox to promote the testing and trialling of new financial product or services. The RBI states that the regulatory sandbox allows market players (including the financial regulator, the innovators and the final users) to “collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks”. This regulatory approach is seen as “an important tool which enables more dynamic, evidence-based regulatory environments which learn from, and evolve with, emerging technologies(Reserve Banck of India, 2019[27]).

  • Canadian Securities Administrators (CSA): in order to support Fintech firms seeking to test new ideas, products, and business models in Canada, the CSA launched a regulatory sandbox that provides fixed-term regulatory relief for start-ups as well as well-established businesses. This initiative is part the CSA’s 2016-2019 Business Plan to better identify and understand the regulatory implications of innovations in the financial sector. As part of this initiative, Impak Finance has for example been allowed to raise CAD 1 million via a cryptocurrency crowdsale.

It is worth noting that the flexibility brought regulatory sandboxes may favour the entrance of new markets players and, therefore, stimulate competition in financial markets. It may also influence the nature of the relationship between regulators and financial industry towards a more open and active dialogue. In addition, this regulatory approach is being actively explored to promote regulatory harmonisation and foster the development of innovations in different markets and jurisdictions. It could indeed facilitate cross border extension (thus allowing business to reach an efficient level of production) and help reduce the potential for regulatory arbitrage. Examples include the Global Financial Innovation Network or the API Exchange (APIX) launched by the ASEAN Financial Innovation Network (AFIN).

The traditional regulatory policy tools provide important opportunities to pause, consult, question and test the approaches that may help tackle the regulatory challenges raised by the development of Fintech. The following sections provide some insights on the range of initiatives launched by governments in this area.

A number of jurisdictions have started putting a strong emphasis on stakeholder engagement to respond to the opportunities and challenges arising from Fintech developments.

  • In 2016, the Monetary Authority of Singapore carried out broad consultations on the regulatory sandbox approach and the creation of the Global Financial Innovation Network;

  • In 2019, the Danish Financial Supervisory Authority created the Fintech Forum. The objective is to “establish an informal forum, where the Danish FSA and the sector can discuss developments in the area of fintech. This may include discussions on how the Danish FSA can support the fintech environment within the scope of the financial regulation. The Fintech Forum can also identify unintended consequences of regulation that prevent or complicate the use of new technologies in the financial sector. Also, the Danish FSA will use the forum to gather knowledge and experience from the sector on fintech issues(Financial Supervisory Authority, 2019[28]);

  • In 2014, UK Financial Conduct Authority (FCA) launched a call for input to understand better the needs of innovators in the financial sector to help maintain the regulatory framework fit for purpose. The results highlights that most stakeholders struggled to understand the regulatory landscape. A number of difficulties have been raised, including:

    • The complexity of existing regulations and guidance (including the FCA handbook and guidance);

    • The difficulties in identifying and interpreting applicable rules, in particular when innovation is straddling or blurring the boundaries of traditional categories and definitions ;

    • The belief that governments or regulators may change the interpretation of the applicable rules as the innovation scales up.

  • Another interesting initiative has also recently been launched by the UK Financial Conduct Authority in 2019 (Financial Conduct Authority, 2019[29]). The FCA released a call for input to better understand the scale of interest and the potential of cross sector regulatory sandboxes. The objective would be to allow business to test new products, services or ideas in a controlled environment with simultaneous oversight from multiple regulators working together. The motivations underlying this initiative are twofold:

    • The fact that the transformative changes associated with technological innovations are not unique to financial services ;

    • The recognition that the cross-cutting nature of some new business models brings challenges to the traditional organisation of regulation. As underlined by (Financial Conduct Authority, 2019[29]), “regulators have different specific remits and tools available to them, and approach innovation in different ways” and there is “no practical mechanism in the UK for multiple regulators to collaborate to actively explore these challenges in conjunction with industry”;

While challenging, international co-operation appears critical to ensure the effectiveness of regulatory action and reduce the regulatory burden that multiple regulatory regimes may impose on businesses and citizens. Initiatives to deal with the transboundary challenges raised by technology-led innovations in the financial sector are also emerging across countries:

  • As reported by (Deloitte, 2018[30]), Singapore has signed 16 agreements with entities in 15 different countries to co-operate in the Fintech area. These agreements include information sharing as well as regulatory guidance to businesses. These initiatives could contribute to the definition of common standards and guidelines to help address the cross-border challenges brought by innovation in financial markets;

  • In 2017, the French Autorité des Marchés Financiers (AMF) and the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM), have signed a co-operation agreement to promote innovation in financial services in France and the United Arab Emirates. The objective of this co-operation is to enable the AMF and the FSRA to support innovative projects, share relevant information on innovation, and provide support in the context of authorisation processes where appropriate. Both authorities will also consider cross-border activities that can benefit to the growth of the financial industry in both jurisdictions;

  • To strengthen the collaboration between the MENA and Asia-Pacific region, the Abu Dhabi Global Market (ADGM), is co-operating with the ASEAN Financial Innovation Network on his regulatory sandbox initiative. The objective is to enable participants to the sandbox to tap into international markets to further develop their financial products or services;

  • To build on the FCA’s early 2018 proposal to create a global sandbox, eleven financial regulators and a World Bank Consultative Group proposed the creation of the Global Financial Innovation Network (GFIN). The GFIN, which gathers 50 organisations, was created in 2019 to serve three main objectives (Global Financial Innovation Network, 2019[31]):

    • To act as a collaborative group of regulators to cooperate and share experience of innovation in respective markets, including emerging technologies and business models, and to provide accessible regulatory contact information for firms;

    • To provide a forum for joint RegTech work and collaborative knowledge sharing/lessons learned; and

    • To provide firms with an environment in which to trial cross-border solutions”.

In 2019, the GFIN announced its intention to take this initiative forward and develop cross-border testing pilots. Eight applications (out of 44 submitted across 17 regulators) have been granted the right to work with regulators on cross-border trials.

  • A number of “Fintech bridges” have also been implemented across the world. As stated by (Fekete, 2018[32]), these bridges “enable regulators to efficiently share information about financial services innovation in their respective markets, including about emerging trends and regulatory issues, aiming to foster innovation in the area of FinTech”. They offer opportunities for business scale across borders and may contribute to reduce regulatory divergence across jurisdictions. The first Fintech bridge was established in 2016 between the UK and Singapore (Fekete, 2018[32]). Another example is the UK-Australia FinTech Bridge created in 2018 2018 (Treasury of the Government of Australia, 2018[33]). Building on the existing Co-operation Agreement between the Financial Conduct Authority and Australian Securities and Investments Commission signed on 23 March 2016, the UK and Australia signed a co-operation agreement to foster co-operation between governments, financial regulators and businesses and “encourage FinTech firms to use the facilities and assistance available in the other jurisdiction to explore new business opportunities and reduce barriers to entry(Treasury of the Government of Australia, 2018[33]). The agreement covers four interrelated pillars: government-to-government, regulator-to-regulator trade and investment and business-to-business. Under the regulator-to-regulator pillar, the agreement specifically mention that implementing authorities will explore the opportunities to develop faster authorisation/licensing processes (in particular for businesses already authorised in the other jurisdictions). The regulator-to-regulator authorities will also facilitate the entry of businesses in their respective regulatory sandboxes to facilitate the testing of new products and services in different jurisdictions and markets. According to (KAE, 2019[34]), there are currently 63 Fintech bridges implemented across the world between multiple jurisdictions. A first global study on 46 Fintech bridges was launched in 2018 (Irish Tech News, 2018[35]). It identifies three common characteristics across the different initiatives:

    • Bilateral mechanism for businesses seeking to access other’s markets;

    • Support provided by regulators to reduce regulatory uncertainty and reduce time to market;

    • Information sharing mechanisms on emerging trends and regulatory issues.

Some governments have invested in horizon scanning activities to better anticipate the risks and opportunities brought by digitalisation in finance. As an example, the FCA’s Future Horizons held a series of discussions with leading experts in financial services to look at the potential developments over the next 15 years. The work used ‘stories’ to create imaginary scenarios on how the future could look like. Building on this work, FCA published a report featuring a selection of these stories, underlying the main drivers of change and the challenges they could generate for policy makers. Four main themes have been considered: the role of data, platforms, innovation and uncertainty (Financial Conduct Authority, 2017[36]).

Technology-driven innovation has been a constant feature of the financial sector for decades. At present, their pace and scope (potential applications of digital technologies spanning across areas such as insurance, lending, payments and investment) is however leading to radical and far-reaching changes in traditional markets and thus a number of regulatory challenges. These challenges owe, among other phenomena, to the emergence of new business models, major impacts on competition and market efficiencies, and implications for data security and privacy. Another key challenge faced by governments in this context lies with difficulties in assigning and apportioning liability and the need to prevent the proliferation of outright fraudulent activities. More generally, regulatory action needs to strike a balance between mitigating potential risks and enabling the development of innovations that can be beneficial for the economy and society as a whole.

Innovative regulatory approaches to support testing and trialling new technologies are essential to that end. Regulatory sandboxes, for example, offer opportunities to roll out and test disruptive technologies in a controlled regulatory environment while helping policy makers gain valuable insights in order to identify the right regulatory (or non-regulatory) approach. Additional options worth exploring include the development of outcome-focused regulations, the creation of innovation offices and other related support mechanisms, and issuance of targeted guidance. Moreover, the fast-paced, cross-border implications of Fintech innovations warrant strengthening international regulatory co-operation and further developing anticipatory approaches to regulation.


[17] Attrey, A., M. Lesher and C. Lomax (2020), “The role of sandboxes in promoting flexibility and innovation in the digital age”, Going Digital Toolkit Policy Note.

[14] Australian Securities & Investment Commission (2016), “Regulatory Guide 255: Providing digital financial product advice to retail clients”.

[21] De Nederlandsche Bank (2016), “InnovationHub year one”.

[30] Deloitte (2018), “The future of regulation: principles for regulating emerging technologies”.

[18] Estonian Financial Services Authority (2018), “The Finantsinspektsiooni Supervisory Board Discusses Prevention of Money Laundering”.

[10] European Banking Authority, European Securities and Markets Authority and European Insurance and Occupational Pensions Authority (2015), “Joint committee discussion paper on automation in financial advice”.

[12] European Commission (2017), “Identifying market and regulatory obstacles to crossborder development of crowdfunding in the EU”.

[32] Fekete, M. (2018), “Global FinTech Bridges: Who, Where & How Many?”.

[29] Financial Conduct Authority (2019), “Call for Input: Cross-Sector Sandbox”.

[38] Financial Conduct Authority (2019), “Guidance on Cryptoassets: Feedback and Final Guidance to CP 19/3”.

[24] Financial Conduct Authority (2017), “Regulatory Sandbox Lessons Learned Report”.

[36] Financial Conduct Authority (2017), “Future Horizons work”.

[37] Financial Conduct Authority (2017), “Regulatory Sandbox Lessons Learned Report”.

[23] Financial Conduct Authority (2015), “Regulatory Sandbox”, https://www.fca.org.uk/firms/innovation/regulatory-sandbox.

[28] Financial Supervisory Authority (2019), “Fintech Forum”, https://www.dfsa.dk/Supervision/Fintech/Fintech-forum.

[22] Forbes (2018), “LabCFTC Director Daniel Gorfine talks Inaugural Year, US FinTech Regulation”.

[31] Global Financial Innovation Network (2019), “Terms of Reference for Membership and Governance of the Global Financial Innovation Network”.

[19] Government Accountability Office (2018), “Financial technology: additional steps by regulators could better protect consumers and aid regulatory oversight”, Report to Congressional Requesters.

[26] Hong Kong Monetary Authority (2020), “Annual Report 2020”.

[4] International Association of Insurance Supervisors (2016), , Newsletter.

[3] International Organisation of Securities Commission (2017), “Research Report on Financial Technologies (Fintech)”.

[35] Irish Tech News (2018), “1st Global Study on the 46 FinTech Bridges Which Governments & Financial Regulators Signed Worldwide Launched at 1st FINTECH Bridge China-UK Conference”.

[34] KAE (2019), “Fintech Bridges Across the Globe”.

[8] Kalda, A. et al. (2021), Smart(Phone) Investing? A within Investor-time Analysis of New Technologies and Trading Behavior., National Bureau of Economic Research, Cambridge, MA, http://dx.doi.org/10.3386/w28363.

[9] Marchant, G. (2011), “Addressing the Pacing Problem”, in The International Library of Ethics, Law and Technology, The Growing Gap Between Emerging Technologies and Legal-Ethical Oversight, Springer Netherlands, Dordrecht, http://dx.doi.org/10.1007/978-94-007-1356-7_13.

[25] Monetary Authority of Singapore (2016), “FinTech Regulatory Sandbox Guidelines”.

[15] New Zealand Ministry of Business, Innovation and Employment (2016), “Review of the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008”.

[6] OECD (2020), “Digital Disruption in Banking and its Impact on Competition”, http://www.oecd.org/daf/competition/digital-disruption-in-financial-markets.htm.

[13] OECD (2020), “Regulatory Approaches to the Tokenisation of Assets”, http://www.oecd.org/finance/Regulatory-Approaches-to-the-Tokenisation-of-Assets.htm.

[7] OECD (2019), Going Digital: Shaping Policies, Improving Lives, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264312012-en.

[1] OECD (2018), “Financial Markets, Insurance and Private Pensions: Digitalisation and Finance”.

[5] OECD (2018), “Regulatory Framework for the Loan-Based Crowdfunding Platforms”, Economics departement working papers No. 1513.

[11] OECD (2016), OECD Pensions Outlook 2016, OECD Publishing, Paris, https://dx.doi.org/10.1787/pens_outlook-2016-en.

[27] Reserve Banck of India (2019), “Enabling Framework for Regulatory Sandbox”.

[16] Securities and Exchange Commission (2016), “Approving a Proposed Rule Change to Require Registration as Securities Traders of Associated Persons Primarily Responsible for the Design, Development, Significant Modification of Algorithmic Trading Strategies or Responsible for the Day-to-Day Supervisio”.

[33] Treasury of the Government of Australia (2018), “UK-Australia FinTech Bridge”.

[39] United Nations Secretary-General’s Special and Cambridge Centre for Alternative Finance (2019), “Early Lessons on Regulatory Innovations to Enable Inclusive FinTech: Innovation Offices, Regulatory Sandboxes, and RegTech”, Office of the UNSGSA and CCAF: New York, NY.

[20] UNSGSA and CCAF (2019), “Early Lessons on Regulatory Innovations to Enable Inclusive FinTech: Innovation Offices, Regulatory Sandboxes, and RegTech”.

[2] World Economic Forum (2017), “Beyond Fintech: A Pragmatic Assessment of Disruptive Potential in Financial Services.”.


← 1. The joint paper covers three sectors: the banking sector, the securities sector and the insurance sector.

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