Fintech seen as a force that will push regulators together

Financial technology, or fintech, should boost integration between regulators in Asia Pacific, though the sector’s novelty means that the form such integration might take remains unclear.

“Fintech is accelerating the debate about how we modernise our financial infrastructure and our legal and regulatory frameworks,” Hiroyuki Suzuki, chair of the finance and economics working group of the Apec Business Advisory Council and vice chairman of the Nomura Research Institute told the South China Morning Post.

Julius Caesar Parrenas, senior advisor at the Nomura Institute for Capital Markets Research, pointed out that a lot of laws around data protection, secure transactions, banking regulations and so on, were enacted in a different age.

“We are moving towards regional integration. Look at supply chains for example, and even before fintech arrived there were already issues around areas like cross border data flows,” he said.

Suzuki said regulators were not sticking to old fashioned methods. “They feel fintech can create a pathway towards economic development, and financial inclusion and it is especially important for SMEs [because] if you put services on a Google or Alibaba platform you can expand across borders,” he said.

The fintech companies themselves are hoping to internationalise as well. “The only way the fintech companies can grow and gain access to more consumers is to look across borders,” said Ian Wood, a partner at law firm Simmons and Simmons. “The issue for regulators is how to manage this. Currently the normal arrangement is that regulators require companies that are based in their jurisdictions, or sell into it to have licences to do so. Unfortunately, at present, things are not as clear as they ought to be.”

The challenge for regulators is to both protect consumer from harm, while allowing them access to new services, which Suzuki believes will add to their economic development. Further links between regulators should help with this, for example, by allowing a company licensed in one country to operate in another more easily.

The question is what practical form this cooperation might take. “Cooperation is a good thing, that’s almost a truism,” said James Lloyd, fintech lead at EY. “However, we haven’t seen much of it in practise. One thing I would like to see, for example, would be agreed standards around ‘know your customer’ and anti-money laundering protocols.

“However, while there is scope for cooperation, you have to remember that national regulators are competing for talent, for start ups, and for capital. While I’d be in favour of removing some needless duplication, I wouldn’t want to see the creation of a sterile competitive environment,” Lloyd added.

Parrenas said it was still too early to understand what risks came with fintech. “A lot of these businesses have not gone through the full credit cycle, and so until regulators understand how these new business models work in a downturn, it is too early for them to undertake regulatory actions,” he said.

“Until the risks become critical, as we are now starting to see in China and India, regulators believe that they should adopt a cautious approach.”

When it comes to cooperation between regions, there is scope for cooperation as a competitive advantage. Some regulators have built up links with their equivalents overseas to attract more fintech businesses. For example, the Financial Conduct Authority (FCA) in Britain has an agreement with the Monetary Authority of Singapore (MAS) and the Australian regulators, which means that if a company meets the criteria as a fintech business, it can be referred to other regions, according to Wood.

This can make it easier for fintech companies to achieve scale between countries. Such agreements are particularly attractive for regulators in different regions who may not be in direct competition with each other. “It is harder to see an agreement like this being formed between Hong Kong and Singapore,” said Wood.