Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.
FinTech and Regulation:
Recent Developments and Outlook
Professor Douglas W. Arner
Janos Barberis
Asian Institute of Inter...
Overview
This seminar serves as an introduction to FinTech and to what extent should this sector be
regulated. The followi...
Background
FinTech Definition
Contraction of the words “Financial” and “Technology”. FinTech broadly refers to the
application of tec...
FinTech History
Banks have historically been the largest spender on IT their budget dedicated to IT keeps
increasing (e.g....
2008: A Game Changer?
The 2008 global financial crisis had a catalysing effect on the growth of the FinTech
sector due to ...
FinTech Opportunities
The shock experienced by the financial sector is being leveraged by new FinTech start-ups
that benef...
Regulation
Financial Regulation
Due to the breadth of the FinTech sector, it is hard to talk about “FinTech Regulation”
per-se. Bette...
Regulatory Implications
There is an emergence of new players (e.g. start-ups) alongside the existing large companies
that ...
Regulatory Threshold
A problem with new emerging FinTech companies is that they have limited track records
regarding their...
Risk Blind-Spot
Using company size (e.g. small, large, systemic) as a way to evaluate risk is not adequate, given
inter-co...
New Risks
New business models and delivery mechanisms create new sets of risks:
• P2P platform capital buffers during cred...
Data add-value
The increasing use of technology within the financial sector also offers opportunities for
regulators to be...
Regulatory Innovation
Regulatory Innovation
Since 2008 national and international regulators have been focused on drafting and
implementing re-a...
Amending Mandates
The regulatory threshold approach has its limits since it can prevent regulators from
engaging early-on ...
Institutional Change
Having regulatory supervision conducted by specialist bodies focused on products appears
inadequate w...
Asian Perspectives
Asian Opportunities
The growth potential of the FinTech sector in Asia is substantial, given the physical
financial infras...
Asian Fragmentation
APAC
25
Jurisdictions
25 sets of
regulations
25 sets of
infrastructures25 sets of
behaviours
Europe:
2...
China’s Approach
Balancing innovation and development.
China has a very rapidly changing environment, recent news:
• Provi...
Hong Kong Context
Hong Kong is a major international financial centre, located in the heart of the world’s
largest opportu...
Hong Kong Opportunities
Given its location, expertise and role as a financial Centre Hong Kong can play a key role
in some...
Future Topics
Open Questions
• What is Hong Kong’s role in China’s financial transition, given its role as a FinTech hub
and how will th...
Q&A
Thank you!
Douglas Arner
Douglas.Arner@hku.hk
Janos Barberis
Janos@fintech.hk
Upcoming SlideShare
Loading in …5
×
Upcoming SlideShare
FinTech: Digital Innovation in the Financial Industry
Next
Download to read offline and view in fullscreen.

Share

#FinTech Regulation Overview co-presented

Download to read offline

This Seminar will initiate a reflection regarding the extent to which innovation within the Financial Technology (FinTech) sector can and should be regulated.

The case will be illustrated with examples of the UK and EU market (e.g. the Financial Conduct Authority (FCA)’s Project ‘Innovate’ and the European Commission’s Single European Payment Area (SEPA)) and the implications for innovation will be discussed.

This will be complemented by introducing an Asian perspective as to the capacity of specific jurisdictions to frame and catalyse innovation, focusing on specific challenges and opportunities in Mainland China and Hong Kong.

Related Audiobooks

Free with a 30 day trial from Scribd

See all

#FinTech Regulation Overview co-presented

  1. 1. FinTech and Regulation: Recent Developments and Outlook Professor Douglas W. Arner Janos Barberis Asian Institute of International Financial Law Faculty of Law University of Hong Kong 26 March 2015
  2. 2. Overview This seminar serves as an introduction to FinTech and to what extent should this sector be regulated. The following themes will be discussed: Background • Definition • Examples • Origins Regulation • Implication • Obligations • Thresholds Innovation • Mandates • Innovation • Benefits Asia • Hong Kong • China • Future
  3. 3. Background
  4. 4. FinTech Definition Contraction of the words “Financial” and “Technology”. FinTech broadly refers to the application of technology within the financial industry and covers a wide range of activities, including but not limited to: Financing Payments & Infrastructure Operations & Risk Management Data Security & Monetisation Customer Interface
  5. 5. FinTech History Banks have historically been the largest spender on IT their budget dedicated to IT keeps increasing (e.g.+4% in 2014). However, today we see a new direction of the digitization paradigm (e.g. direct consumer solutions): • 1967: Barclays deploys first Automated Teller Machine (ATM) • 1971: NASQAQ is created, triggering electronic trading • 1989: Program trading starts to be used by financial institutions • 1990: Value at Risk (VaR) model used for automatic risk pricing and portfolios • 1997: The Octopus card is launched in Hong Kong • 2000: Introduction of Dark Pools and High Frequency Trading • 2005: Zoopa creates the UK first Peer-to-Peer platform
  6. 6. 2008: A Game Changer? The 2008 global financial crisis had a catalysing effect on the growth of the FinTech sector due to a series of factors: • Financing gap: Contraction of the interbank market (e.g. trust issues) and increase in regulatory capital to be held against loan portfolio (e.g. additional +US$150bn set aside) • Operational cost reduction: Downsizing teams (e.g. IT & Back/Middle office) plus using technology to reduce costs (e.g. straight-trough processing) • Compliance cost increase: Increasing set of new and additional compliance obligations for banks, diverting resources and creating chilingl effect towards innovation
  7. 7. FinTech Opportunities The shock experienced by the financial sector is being leveraged by new FinTech start-ups that benefited from a set of factors: • Human capital: Staff within financial sector that had necessary expertise and experience left industry to join or build FinTech companies • Public perception: Growing distrust of formal financial institutions from the public allowed new entrants to emerge (e.g. UK challenger banks, P2P or FX platforms) • Technology: Access to technology democratised due to new pricing models (e.g. Software as a Service (SaaS)) removed high upfront cost that acted as barrier to entry
  8. 8. Regulation
  9. 9. Financial Regulation Due to the breadth of the FinTech sector, it is hard to talk about “FinTech Regulation” per-se. Better to break down high-level approaches (e.g. risk- or product-based) and complement them with a sub-set of specific regulations (e.g. payments, anti-money laundering). Broadly speaking, financial regulators have 4 key mandates: Financial Stability Prudential Regulation Conduct & Fairness Competition & Development
  10. 10. Regulatory Implications There is an emergence of new players (e.g. start-ups) alongside the existing large companies that were already in the space (e.g. core banking vendors). However, unlike large IT vendors, certain start-ups use technology to disintermediate banks and directly propose their services or products to consumers. This creates a set of questions: • Increasingly a blurred line: Who can/should provide financial services or products? • How to balance start-up low cost models and agility benefits with compliance costs? • How can regulation cover an increasing number of new business models and match speed of innovation cycles?
  11. 11. Regulatory Threshold A problem with new emerging FinTech companies is that they have limited track records regarding their business (e.g. risk management, liquidity and profitability) and a difficult time to identify what are their obligations (e.g. applicable regulations or licences). For regulators, these early-stage companies represent a limited prudential & consumer risk. However, exponential company growth can create a “risk blind spot”. Additionally, frequent failures or fraud can impact market or investor confidence (e.g. Mycoin in Hong Kong), which are also mandates for regulators (e.g. HKMA) Too Small to Care Too Big to Fail Too Large to IgnoreTacit acceptance Licensing obligation
  12. 12. Risk Blind-Spot Using company size (e.g. small, large, systemic) as a way to evaluate risk is not adequate, given inter-connectedness of financial markets and rapid up-take of certain financial products. Today, small companies’ path to become systemic is not linear but exponential: • US (2010): Small mutual fund group Waddell & Reed suspected of being responsible for the S&P 500 flash crash (e.g. 10% fall due to algorithm trading chain effect) • China (2014): Third party mobile payment market reached 1,433 trillion yuan, a +400% increase compared to 278 trillion exchanged in 2013 • China (2014): Yu’e Bao, a money market fund part of Ant Financial Group (Alibaba) holds over US$ 90billion (e.g. 4th largest in the world) in just 10 months after its creation
  13. 13. New Risks New business models and delivery mechanisms create new sets of risks: • P2P platform capital buffers during credit cycle change or interest rate liberalisation  2.5% deposits vs 15% P2P lenders (e.g. warning over 1’250 platforms in China) • Money Market Fund (MMF) maturity mismatch enhanced by technology  Technology facilitation of on-demand redemptions (e.g. “mobile app bank run”) • Existing risks even for platforms that are matchmakers instead on intermediaries  Removal of CHF/EUR peg led to counterparty, settlement and market risks • Scalability of process, policies and risk management frameworks  Particularly for companies with exponential growth (e.g. loan origination quality)
  14. 14. Data add-value The increasing use of technology within the financial sector also offers opportunities for regulators to better perform their roles. The UK FCA has started to evaluate the benefits provided by the blockchain technology and there are also other examples: • Smart contracts: Reducing costs and trust issues around contractual performance • P2P lending: Providing real-time visualisation of geographical spread of credit risk • Blockchain: Ensuring Multilateral Trading Facilities (MTF) obligations under MiFID • E-money: Limiting the extent of money laundering issues with cash transactions • Data transparency: Allowing regulators to directly audit financial institutions
  15. 15. Regulatory Innovation
  16. 16. Regulatory Innovation Since 2008 national and international regulators have been focused on drafting and implementing re-active regulations covering the causes of the global financial crisis to avoid its repetition. However, the increased layering of regulations and compliance cost also allowed new FinTech start-ups to emerge. There is nonetheless a set of pro-active regulations that were forward-looking and have allowed for innovative businesses propositions to emerge. • US: Jump-start Our Business Start-up Act 2012 (JOBS Act)  Alternative financing • EU: Payment System Directive 2008  Real-time payments • UK: Small Business, Enterprise and Employment Bill  Loan referral to P2P
  17. 17. Amending Mandates The regulatory threshold approach has its limits since it can prevent regulators from engaging early-on with new FinTech companies. In the UK, the Financial Conduct Authority has under the Financial Services Act 2012 a new mandate whereby it should be ‘promoting effective competition in the interest of consumers in the market for regulated financial services’ As a result, this pushes the FCA to engage with even earlier-stage companies, provided that they can stimulate competition and have a positive impact on consumers (e.g. better services, cost reductions).
  18. 18. Institutional Change Having regulatory supervision conducted by specialist bodies focused on products appears inadequate when looking at the rate at which technological progress occurs. Indeed, this can create grey areas as to what is the regulatory body on which a specific business falls (e.g. insurance companies performing banking activities in the US pre-2007). Additionally, the use of personal data to tailor pricing levels or risk thresholds of consumers means that there will be an increasing granularity of products and services provided. Thus, financial innovation driven by technology must be preferably overseen in the context of a twin peak model such as the one used in the UK. This would be particularly relevant in Hong Kong and China that have more a sectorial approach.
  19. 19. Asian Perspectives
  20. 20. Asian Opportunities The growth potential of the FinTech sector in Asia is substantial, given the physical financial infrastructure gap and limited legacy behaviour of consumers. Additionally, the level of development of the financial services industry is comparatively less mature than the West. The FinTech sector offers an opportunity for governments to infuse innovation within their traditional financial sector by driving competition and weeding-out inefficiencies. However, liberalisation and increased competition are only gradually introduced (e.g. touching the stones to cross the river) due to the highly political, social and economic impact of financial sector.
  21. 21. Asian Fragmentation APAC 25 Jurisdictions 25 sets of regulations 25 sets of infrastructures25 sets of behaviours Europe: 27 Jurisdictions Harmonized Regulation Homogeneous Market USA: 51 Jurisdictions National Regulation Homogeneous Market Vs Vs However, unlike the US and EU markets that are more homogeneous in their composition, the Asian market remains fragmented, limiting the rapid scalability of certain FinTech businesses.
  22. 22. China’s Approach Balancing innovation and development. China has a very rapidly changing environment, recent news: • Provide backdoor to IT systems of financial institutions • 1’250 credit rating alert on 1’250 P2P platforms • Consideration of regulatory capital requirements (e.g. US$3.5million) for P2P platforms
  23. 23. Hong Kong Context Hong Kong is a major international financial centre, located in the heart of the world’s largest opportunity for FinTech growth: Hong Kong 4.3m HNWIs 600m Digital Bank Customers 28% world middle class Government Support 5h flight + 13% p.a + 300% by 2020 25th Feb 2015 budget speech 66% by 2030 1st Financial Centre in Asia – 3rd in world
  24. 24. Hong Kong Opportunities Given its location, expertise and role as a financial Centre Hong Kong can play a key role in some of these opportunities: FinTech Financing Payments & Infrastructure Operations & Risk Management Data Security & Monetisation Early & Angel VC Listing HK + Mainland RMB Internationalization Mainland in-out Connects Mutual Recognition ASEAN APEC Regulation IT – Regional International HQ Data Processing Data Mining Data Storage
  25. 25. Future Topics
  26. 26. Open Questions • What is Hong Kong’s role in China’s financial transition, given its role as a FinTech hub and how will this shape the city’s future as a financial center? • Can Hong Kong establish its FinTech leadership by creating a set of regulations or mutual recognition regimes allowing the scalability of certain products and services? • Can regulators set a framework that allows the low-cost business model of FinTech companies to co-exist with the perceived costly financial regulation? • What are the regulatory consequences of China leapfrogging the world by delivering financial services and products on a scale that was never done before? The emergence of the FinTech sector in Hong Kong and its recent establishment as a FinTech hub opens a series of questions:
  27. 27. Q&A Thank you! Douglas Arner Douglas.Arner@hku.hk Janos Barberis Janos@fintech.hk
  • anandsaha124

    Feb. 2, 2018
  • HctorCabreraDazInfan

    Feb. 19, 2017
  • BibiBraz

    Jul. 10, 2016
  • lang1203

    Jan. 24, 2016
  • GKCMOTOR

    Jan. 24, 2016
  • ChirstyMacKenzie

    Dec. 6, 2015
  • HLOP123

    Sep. 29, 2015

This Seminar will initiate a reflection regarding the extent to which innovation within the Financial Technology (FinTech) sector can and should be regulated. The case will be illustrated with examples of the UK and EU market (e.g. the Financial Conduct Authority (FCA)’s Project ‘Innovate’ and the European Commission’s Single European Payment Area (SEPA)) and the implications for innovation will be discussed. This will be complemented by introducing an Asian perspective as to the capacity of specific jurisdictions to frame and catalyse innovation, focusing on specific challenges and opportunities in Mainland China and Hong Kong.

Views

Total views

6,703

On Slideshare

0

From embeds

0

Number of embeds

37

Actions

Downloads

287

Shares

0

Comments

0

Likes

7

×