Head of European Banking Authority Says the Regulate and Restrict Approach to Fintech is Ineffective

Let Fintech Innovation Reign

The Head of the European Banking Authority, Andrea Enria, delivered a fascinating speech last week in Copenhagen.

Enria addressed the challenge of appropriate regulation when it comes to innovation in finance. Fintech needs freedom to grow and evolve and slapping on existing rules is a misguided approach when it comes to fostering beneficial change. But this balancing act is a difficult one.

Quoting the text of his speech, Enria stated;

“The regulate and restrict approach is most often ineffective … the curb on innovation is likely to cause a significant loss of efficiency and competitiveness, which can be detrimental to the economy and not sustainable in the long term. The “let things happen” attitude has allowed a formidable increase in the risks in the unregulated sector, outside supervisory scrutiny. When the risks materialised, the complex web of interconnections between unregulated firms and regulated banks gave rise to a systemic crisis of unprecedented proportions. The idea that authorities could intervene, ex post, to clean up the mess and limit the damages to the economy, has proven misguided.”

Today, most approaches sit smack in the middle of delivering the “same risk – same rules” but new does not always require the same regulatory solution. Change is hard.

Enria believes that applying bank like supervision to Fintech firms is likely to be a “sub optimal solution.” Excessively constraining innovation by compelling Fintechs to deal with bank like rules is simply not sustainable for a small startup attempting to competed with a bigger financial institution. One size does not fit all.

The regulate and restrict approach is most often ineffective ... the curb on innovation is likely to cause a significant loss of efficiency and competitiveness, which can be detrimental to the economy and not sustainable in the long term #FintechClick To Tweet

Enria addresses the emergence of cryptocurrencies. He expresses his concern that several central banks (think Bank of England) have argued that digital currencies cannot fulfill the function of money. He is skeptical of this opinion. Referencing a statement from 2014, Enria explains a possible regulatory approach that is more nuanced, and would allow crypto-innovation to flourish. His suggestion iss built around “three pillars”;

  • full application of customer due diligence obligations under the anti- money laundering and counter terrorist financing (AML/CFT) regulations – a point that has now been included under the revised Anti-Money Laundering Directive (AMLD5);
  • warnings to consumers that investments in these assets are not protected by any regulation and, therefore, by any safety net, so that they may lose all the money invested – a step that has been accomplished through a recent warning we issued jointly with ESMA and EIOPA; and (iii)
  • preventing regulated financial institutions from buying, holding or selling these products – and possibly also from establishing direct or indirect connections with managers of cryptocurrencies –, so as to segregate the two sets of players and avoid contagion.

He believes this strategy would avoid granting any official recognition to a sector that is changing fast and difficult to regulate. Simultaneously it would tell the public these are highly speculative entities and there are no public guarantees for any public protection in these digital assets.

Rigorous but Proportionate

Referencing research by Kevin Werbach of Wharton, Enria shares that a “conscious choice by regulators of not imposing the full set of rules on a nascent technology can lead, as the technology gains pace, to a more mature and productive dialogue among innovative firms.”

'conscious choice by regulators of not imposing the full set of rules on a nascent technology can lead, as the technology gains pace, to a more mature and productive dialogue among innovative firms.'Click To Tweet

Enria’s perspective is a must read for all policymakers in the Fintech realm. Innovation needs room to thrive and survive. Traditional finance will, of course, cast dispersion upon challenging entities that want to compete for their business and disrupt core services. This is a natural reaction but regulators must listen with a balanced ear. Fintech is poised to provide better services at a lower cost and competition is core to facilitating this important goal. Hobbling innovation with old rules for old services is easy to do but a shortsighted policy solution. Hopefully, regulators will pursue a road less traveled and let innovation reign.

The text of the speech is embedded below.

Andrea Enria's speech on FinTech at Copenhagen Business School 090318
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