Do we need a global technology regulator for financial services?

This is a guest post by Axel P. Lehmann, UBS president of personal and corporate banking and president of UBS Switzerland, and Steffen Kern, chief economist and head of risk analysis at the European Securities and Markets Authority (Esma). Both are also members of the WEF global future council on financial and monetary systems.

Consistent international standards are vital to underpin the efficient flow of capital to the best opportunities. Cross-border financial intermediation provides the necessary connection between borrowers and savers, which supports GDP growth.

We saw this exemplified following the financial crisis, when the international community, through the G20 and the Financial Stability Board (FSB) developed an ambitious global response. A global crisis demanded a global reaction. International co-operation among regulators was central to making financial markets more resilient.

This said, the world of 2008 was very different to the one in which we are currently operating. Increasingly, inward-focused domestic policy perspectives are shaping policy agendas. Evidence of this shift in political strategy is seen in the US “doctrine of patriotism”, the UK’s decision to leave the European Union, and escalating trade disputes as a few examples. The belief that going it alone yields better outcomes than international co-operation continues to gain traction.

And these tendencies are deeply concerning. Our global economy is characterised by unprecedented levels of interconnectedness and these connections have benefited many citizens, investors and corporations.

The new challenge posed by technology

While certainly not a global crisis, technology is currently positioned to cause tremendous change in financial services at a global level. Distributed ledger technologies, artificial intelligence, machine learning and other innovations have the potential to change business models and value chains across the financial industry.

A recent example of new opportunities made possible through technology is the development of digital identities (E-IDs). E-IDs are particularly significant as verifiable identities are key to the next phase of the digital financial experience. The main benefit of an E-ID will be its transportability, enabling clients to access their optimal choice of services wherever and whenever they choose in a borderless online world. Important policy advances have been made in some economies, but E-IDs will only work if there are common regulatory standards and recognition of various E-ID schemes at international level.

Aligning international regulation is not a challenge isolated to E-ID technology. Rapid technological change has the potential to usher in a new phase of financial globalisation, with benefits for investors and households in both developed and developing countries. However, making effective use of technology's potential will require a new wave of global policy co-ordination.

Why technology in financial services requires co-ordinated regulation

As new technology multiplies and becomes ubiquitous in the financial sector, new risks will need to be contained and regulatory frameworks will need to be internationally co-ordinated and upgraded.

From a risk perspective, cyber security and cyber resilience are top priorities. According to the World Economic Forum Center for Cybersecurity, economic loss due to cyber crime is predicted to reach $3tn by 2020, and 74 per cent of the world’s businesses can expect to be hacked in the coming year. Digital connectivity makes cyber crime a global threat that requires a standardised approach, yet, as recognised by the FSB, regulatory and supervisory approaches to cyber security are becoming increasingly fragmented, undermining the effectiveness of financial institutions' efforts to address cyber threats.

Additionally, new products, business models and players fall out of the current remit of existing regulatory and supervisory mandates of banking and capital markets authorities. This requires reflecting on the need for adaptation of existing mandates as well as on the necessity of aiming for a single regulatory approach to technology in financial services at international level.

Unlocking the benefits of new technology

Despite the regulatory challenges, the opportunities made possible with new technology are too great to ignore. Such changes range from product design to client interaction to back office operations to compliance and reporting. And they can translate into significant benefits for consumers of financial services as well as society in general.

Mobile and internet-based services are being made available independent of physical location. Only via co-operation will global resilience be ensured and the necessary level playing field emerge, enabling higher liquidity in financial products, safer transactions, fair pricing, lower compliance costs and less complexity — all to the ultimate benefit of corporate and retail consumers of financial services.

In terms of inclusion, new technologies also have great potential for supporting access to finance in less developed regions of the world, with mobile payment platforms in Kenya or India being prime examples. Yet, the challenges from multinational payment systems in terms of investor protection, information security and system integrity will be similar around the world and they will require a cohesive response.

Global policy co-operation on emerging technology is necessary to enable better finance

Opportunities will emerge from these technological changes. And they have immense potential. Globally aligned standards, data templates, protocols, conduct-of-business and anti-fraud rules are necessary preconditions for optimal development of new technological advances to support growth and, ultimately, societal wellbeing. The conclusions of the recent G20 Summit in Buenos Aires send a reassuring message, highlighting the commitment to continued regulatory and supervisory co-operation.

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