FSB: No Systemic Risk from Fintech Now but Counsels Future Vigilance

The Financial Stability Board (FSB) released a report into financial stability issues arising from the growth in fintech on June 27, examining fintech applications by sector, and more specific developments, such as distributed-ledger technology (DLT) and robo-advice.

Given a lack of maturity in most fintech models, the report suggests, most developments are too embryonic to pose any sustained threat to financial stability at present, but microfinancial risks could be on the rise.

“Fintech innovations can potentially have an adverse systemic impact on the financial system, although there is no evidence of such an impact at present,” the report states.

Among such risks are the reliance on third-party providers, the potential for cyberattacks to succeed at small firms with limited protection programs, and both legal and business risks arising from the possibility that some fintechs such as payment systems may, at some point, become systemically important.

Theoretically, these microfinancial risks, coupled with macrofinancial areas of concern such as procyclical activities, excess volatility and contagion effects could morph into problems warranting the attention of prudential regulators.

“While there are currently no compelling signs of these risks materialising, experience shows that they can emerge quickly if left unchecked,” the report says. “The importance and prevalence of complex networks and associated contagion effects could increase as fintech gains prominence—indeed this may be an outcome of cloud computing services and DLT.”

Data Drought

The primary issue with assessing the risks posed by fintech firms—on both a macro and micro level—is the availability of data, says a US-based former regulator who now advises fintech firms on regulatory issues.

“When you’re talking about systemic risk, usually there’s some kind of base level analysis you can do from readily available information—for example, counterparty exposures and notional amounts in the derivatives markets, through to exchange data for equities, bank capital levels and so on. With fintech, you really don’t have that. Outside of the really big firms, most of these guys are private startups,” he says.

The FSB report makes mention of this fact, describing the task of assessing the financial stability implications of fintech’s rapid growth as challenging for precisely this reason.

“Any assessment of the implications of fintech for financial stability is challenged by the limited availability of both official and privately disclosed data in the fintech area,” the report says. “Authorities should consider developing their own capacity to access existing and new sources of information.”

The extent to which this is already in place, or likely to be established in the near future, depends largely on regional interest in fintech. Some regulators, including the UK’s Financial Conduct Authority, the Hong Kong Monetary Authority, the Monetary Authority of Singapore and the US Commodity Futures Trading Commission have been receptive to fintech, and established dedicated programs meant to allow startups to grow within a regulated framework.

Another aspect of difficulty arises from the fact that many of the technologies that fall under the fintech umbrella, including DLT, are largely in a theoretical stage of development, or at the most in proof-of-concept phases. Legal structures governing areas such as settlement finality are still being constructed, while standards are at an early stage of construction.

“You have to kind of assume they’re not big enough to do any real damage yet, but that’s not a comfortable position for any regulator to be in,” says the former regulator. “It’s a fine balancing act between giving these guys enough room to breathe, regulating them enough for there to be some level of accountability, and not squeezing them so tightly that you choke the innovation aspect of what they’re doing.”

Fintech has made great strides in recent years across virtually all aspects of the financial services industry. Subsets of fintech, including regtech and insurtech, are keen areas of interest for firms specializing in artificial intelligence and machine learning, while regulators have sharpened their focus on the effects that fintech will have on the financial industry, most recently with a consultation from the European Commission.

However, a report from consultants KPMG estimated that global fintech funding dropped to $24.7 billion in 2016 from a record $46.7 billion in 2015, despite a rise in venture capital investment.