One option is to group financial activities into a dedicated subgroup under an FHC structure. A second is to create a new regulatory category for big tech financial groups.
The BIS (Bank for International Settlements) has released a new paper calling for a rethink on big tech regulation, offering two specific regulatory approaches for consideration.
The paper says big techs could pose a threat to financial stability because their business models entail “complex interdependencies between commercial and financial activities and can lead to an excessive concentration in the provision of both financial services to the public and technology services to financial institutions”.
The paper proposes two specific regulatory approaches for big techs that could be considered to address the challenges posed by this specific business model.
The first approach is ‘segregation’, which seeks to control risks arising from interconnections between financial and non-financial activities by grouping all financial activities into a dedicated subgroup under a financial holding company structure.
The subgroup would need to satisfy specific ring-fencing rules, such as the suspension of common use of group-wide technology platforms and data sharing within the group, to minimise interdependencies and prevent the misuse of data to build positions of market dominance.
Segregation could be implemented at the global or at the jurisdictional level, and represents a “relatively simple approach” to mitigating risks arising from big tech interdependencies, the paper says.
However, it notes that limits on interdependencies could weaken the business case for big techs to offer financial services, thereby hampering technology-led innovation in financial services and other benefits that big techs could bring to the financial industry.
The second approach is ‘inclusion’, which would involve the creation of a new regulatory category for big tech groups with significant financial activities, a so-called big tech financial group (BTFG).
Regulatory requirements would be imposed on the BTFG as a whole, including the big tech parent, but would focus particularly on controls for intragroup dependencies across financial and non-financial subsidiaries.
The new rules and obligations would coexist with the existing requirements for the regulated subsidiaries, where the big tech parent would be responsible for obligations imposed at the group level mainly relating to governance, conduct of business, and operational resilience.
Consolidated capital requirements would not be imposed for the BTFG unless the group falls under the current prudential categories for financial groups.
The paper says the inclusion approach provides a more comprehensive and tailored option to address specific risks associated with big techs’ business models, but that it is also more complex, particularly in relation to supervisory oversight.
Here, the paper suggests that effective oversight of a BTFG requires coordination between the relevant financial, competition and data authorities and considers the supervisory college approach as a way forward, either at a global or jurisdictional (regional) level.
Speaking to Regulation Asia, Jamie Lloyd Evans, one of the co-authors, said he hopes the paper will be “a significant contribution to the debate on the appropriate regulatory response to big tech activities in financial services” and that it provides “clarity and depth to the discussion”.
The paper is published here.