A regulatory roadmap for financial innovation

Abstract

Private sector innovation – whether it is fintech, biotechnology, the platformisation of the economy, or other developments – is the single most profound challenge that regulators confront today. Financial innovations, which are intangible and fast-moving, are especially challenging. Financial regulators are at the operational front line of making sense of the promise and the risks associated with fintech, and helping to ensure it operates for public benefit. Faced with such a changeable and fast-moving problem, how can regulators “future proof” themselves? This chapter outlines a road-map for financial regulators who confront fast-moving and profound change in their sectors. It argues that regulators’ first question in any decision-making context should be, “how is private sector innovation, in this case fintech, undermining my assumptions, changing relationships, denaturing products and markets, and seeping around regulatory definitions and boundaries, right now?” The chapter sets out the four basic questions that regulators should consider. It proposes regulatory responses based on better data collection and analysis, innovation research, network theory, and regulatory design. It considers how to make regulation more adaptable and more resilient, and examines the strategic choices regulators can make in framing fintech innovations.