A senior board member at the Bank for International Settlements (BIS) has asked for a coordinated regulatory response in order to limit the incursions of Big tech companies such as Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) into financial services. The senior office argued that the current rules are “not fit for purpose.”
While speaking at a BIS conference in Switzerland, Agustín Carstens, BIS general manager, said that as Big Techs continue to focus more financial services with the support of their data-powered business model, it is “increasingly evident that the current regulatory approach is not fully fit for purpose to address related policy challenges.”
Agustin believes that “a regulatory re-think is warranted, and it is high time to consider tangible options for action.”
He thinks that Big Tech’s control of user data, along with their overall size and customer reach, might lead to a change in the financial services sector, thus leaving major banking institutions at a considerable disadvantage.
Although Big Techs may encourage more competition, he adds, network effects enable them to establish positions of dominance in certain market segments, for instance, by increasing user switching costs or significantly raising entry barriers. As systemically-important entities, they could then become “too big to fail,” leading to concerns regarding financial stability.
Carstens added that the existing regulatory frameworks are not suitable with Big Techs in mind and aren’t geared towards potential spillover effects across all activities such companies perform or their potential systemic relevance.
He shares several alternative approaches as a foundation for a regulatory framework that attempts to move away from ‘activity-based’ rules and guidelines to ‘entity-based’.
The “restriction” approach could prevent Big Techs from carrying out regulated financial activities.
The “segregation” approach could require Big Techs to establish a financial subgroup that may be ring-fenced. And the “inclusion” approach may impose group-wide guidelines on governance, conduct, operational resilience as well as financial soundness.
He further noted:
“The segregation and inclusion approaches are to some extent compatible, and in practice a combination of both may be desirable. The implementation of any new regulatory framework raises a host of practical questions. To support the search for answers, a thorough international policy debate is essential. After all, international standards are the only way to shape a consistent policy response.”
According to Carstens, “regardless of the approach chosen, the implementation of any comprehensive entity-based regulatory framework for big techs is beset with challenges and raises a host of practical questions.”
One is how “to ensure effective cooperation and information-sharing between financial, data and competition authorities at the local and cross-border level.”
Another is “whether any one authority has the expertise required to serve as lead supervisor for global groups that engage in a wide set of data-driven financial and non-financial activities.”
Yet another is “about enforcement and extraterritoriality, especially when big tech services are performed by entities incorporated in foreign jurisdictions,” he added.
This, together with unavoidable political considerations, may also explain “why progress
towards a new framework has been slow.”
“I’m afraid to say, as we are working on devising an adequate policy response to big techs, challenges will continue to emerge. Innovation never rests, as recent advancements in artificial intelligence and the emergence of quantum computing make clear. But I am confident that the international community will find ways to address current and coming challenges.”