The impacts of technological innovation on regulatory structure: Fintech in post-crisis Europe

Specific forms of digitised financial innovation have been the subject of several chapters in this volume: Chapter 2 studied the regulation of high-frequency trading and Chapter 3 the role of clearing houses and central depositories in derivatives trading. In this chapter, we examine technological innovation more broadly and in its own right, considering its impact on European regulatory structures in recent years. How does technological innovation, or ‘Fintech’,1 in major financial markets – currencies, payment systems, capital markets, alternative intermediaries and insurance – impact upon regulation? The dynamic features of financial markets and the innovation of complex financial products and services based on new technologies and business models present regulators with significant challenges. Specifically, how can they effectively scrutinise unprecedentedly large volumes of market data? Is ‘Regtech’, an instrument developed by private actors, able to ensure compliance with public regulation? Does an alternative approach which institutionalises public–private cooperation offer answers to new regulatory challenges? New financial technologies and activities often do not fall within the purview of established regulatory regimes, leading to a situation where regulators are playing catch-up with the private sector. At the very least, this necessitates further engagement between public and private actors; at most, it calls for sweeping reforms to regulatory rules and strategies. While it is routine for regulators to encounter asymmetric information problems in interactions with firms (Besanko and Sappington 2001), these are acute in sectors such as finance where disruptive innovation can lead to a state of ‘Knightian uncertainty’, as was demonstrated by the most recent financial crisis itself (Nelson and Katzenstein 2014). A key lesson drawn from the 2008 crisis was that if