Question

Question 2 (20 marks)
Assuming you are appointed as the advisor of the regulatory department of the central bank in Hong Kong. What the rise of fintech products and services, the department is considering adjusting current regulations to meet the changing world. Write a report providing your view, analysis and advice to the department including the following points:
A.Regulations in relation to the rise of financial technology (fintech); (10 marks)
B.possible considerations when setting regulations? (Apply the concepts you have learnt in the class by illustrate your points using the experience of 2008 financial crisis) (10 marks)

Answer 1

A.As the fintech ecosystem matures, banking and financial regulatory regimes are also evolving swiftly. Financial regulators are now evaluating existing rules and are considering the adoption of new regulation to better address both the opportunities and challenges presented by new technologies. In particular, financial regulators in the United States, Europe, and the United Kingdom have recently enacted, or are in the process of enacting, a number of policies and rules specifically targeting fintech innovation. The disruption and evolution in banking and financial services caused by fintech innovation has heightened the need for these new policies and rules to be both thorough and forward thinking.
Fintech innovation driven by non-bank entities is progressively deconstructing the walls that have long surrounded the traditional financial and banking system and is causing a radical shift by challenging conventional value chain, business models, and market positioning. Significantly, fintech innovation is changing costumers’ experience and expectations by promoting a more client-centric and interactive approach to financial and banking services. In addition, recent developments in fintech offer new opportunities for client value creation by enabling smarter understanding of clients’ needs and the design of new personalized products and services. Analytical tools that collect and integrate structured and unstructured data are now available to support process optimization, risk management, and strategic decision-making. Moreover (and perhaps most important), by leveraging the widespread reach of data networks and smartphones, fintech innovation is gradually expanding access to liquidity and financial and banking services to a broader segment of the global population.

Regulatory oversight and regulation are, thus, critical factors for the growth of the fintech ecosystem and could significantly affect the extent and speed of its future developments. The research project will delve deep into this point by analyzing and comparing the rapidly evolving fintech legislative and regulatory frameworks in the United States, Europe, and the United Kingdom. Building on the findings of this comparative analysis, the research project will, then, examine proposals of new regulation that could facilitate more safe pilot-type, small-scale fintech innovation and could enable more effective supervision of the way risks from fintech innovation are identified and addressed. The research project will, then, conclude by discussing initiatives aiming at promoting ongoing and more effective dialogue between fintech industry and financial regulators, as well as more effective cross-border coordination of fintech regulatory oversight.

Departing from Hung and Luo (2016)’s analysis, traditional banks that have been protected for too long will not offer a friendly environment for fintech start-ups. Here, they will face high barriers to entry, tough competition, and a market that already enjoys services from existing banks. Government intervention in this sector is less likely, since the government will not want to damage the foundations of these traditional financial institutions or stimulate systemic risk (Chen, 2016). This might suggest that a more systematic and consequential interaction between management scholars and (business) laws might be of benefit.

Admittedly, fintech is pivotal not only in increasing the accessibility and diversity of services but also in stimulating financial sector development (Gabor & Brooks, 2017; Haddad & Hornuf, 2018; Swartz, 2017). Thus, a better understanding of fintech and regulatory realms is mandatory for this and the democratisation of financial services. Indeed, the regulatory realms, as well as the institutional logics that prevail, represent a critical force shaping every economic actor involved in the fintech industry.

What we should not forget is that the intersection of functionalities, consumers, technological platforms, and emerging business models, defined by the rising fintech firms, has challenged the regulators in many different ways (Arner, Barberis, & Buckley, 2015; Arner et al., 2016). Regulation usually trails behind technological innovation and is often tardy in responding to new business models and practices (Gozman & Currie, 2014). Thus, it is necessary that we analyse the problems these new fintech firms will face in pushing further against so many jurisdictional boundaries at once.

B.For fintechs, the future is promising. But the future also brings increased exposure to regulatory requirements, sanctions, and legal actions. Here’s a brief look at the fintech risk landscape and how fintechs can thrive in a more regulated business environment.

Historically, the mantra of the fintech industry has been: “We are not financial institutions.” Unconstrained by many regulatory requirements that are applicable to banks and other financial institutions, fintechs pride themselves on creating deep customer connections, navigating market trends agilely, and creating disruption for traditional competitors.

But recent regulatory and industry developments suggest the future of fintech will see a potential blurring of the lines:

• Some fintechs are considering or pursuing bank charters, enabling them to compete more broadly and to avoid having to address disparate regulatory requirements across individual states where they conduct business.
• Banks are courting—and, in some cases, are already working with—fintechs to leverage their disruptive capabilities and meet the demands of tech-savvy consumers.

Though diverse in their origins and fact patterns, recent regulatory actions specific to fintechs share several traits:

• They involve fintechs—in some cases, household names, and in others, less-known upstarts.
• They’re all recent and illustrative of the regulatory action being taken today, the oldest being initiated in 2015.
• They highlight regulatory, operational, and reputational risks that, in many respects, threaten the safety and soundness of a bank or other financial institution.

In addition, the number of actions addressing customer treatment suggest that consumers expect regulatory protection associated with fintech products and services that are bank-like, yet are delivered though non-traditional channels that focus on ease and pace of access.

Rising regulatory voices

In 2016, the Office of the Comptroller of the Currency (OCC) published a paper on its “vision for responsible innovation in the federal banking system.” This initiative opened the door for fintechs to continue their pursuit of growth by working collaboratively with regulators to develop solutions specific to the regulation of their product offerings.

On July 19, 2017, speaking before the Exchequer Club in Washington, DC, Keith Noreika, acting Comptroller of the Currency, expressed strong support for the responsible innovation initiative. He characterized the proposal to grant special purpose national bank charters to fintech companies as “a good idea that deserves the thorough analysis and the careful consideration [OCC is] giving it.”

Coincidently, six days after the acting comptroller’s remarks, Varo Money, a mobile-only fintech company, filed an application with the OCC for a full national bank charter and a complementary application with the Federal Deposit Insurance Corporation (FDIC) for deposit insurance.

Varo became the second fintech company to seek FDIC insurance, following Social Finance Inc. (SoFi), which filed an application with the FDIC in June to establish a Utah-chartered industrial loan corporation (ILC). SoFi’s ILC application reignited a longstanding debate about the efficacy of this type of bank charter, and the FDIC’s decision on granting new ILC charters could have major implications for the fintech industry.

Other authorities are also addressing fintech-related regulatory concerns. In June, the Financial Stability Board (FSB) published a report on the financial stability implications of fintech firms. Although the report concludes that there are “currently no compelling financial stability risks from emerging fintech innovations,” it identifies 10 supervisory and regulatory issues that “merit authorities’ attention.”

The future of fintech

Regardless of the approach fintech companies take to regulated markets—whether becoming a chartered institution or remaining as they are—they can increase their potential for success by having solid risk management controls in place. Given increasing regulatory attention and the need to have controls that enable them to both know and treat customers well, a compliant company may well be more attractive to the public.

That differentiation could open doors to market share and revenue growth. It might also give a level of comfort to a variety of stakeholders, including:

• The consumers the company interacts with
• The company’s board and management
• Analysts (both rating agencies and equity) who value the transparency and risk management practices of companies
• Regulatory organizations that might take interest in the company

Regulatory & Operational Risk

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