Authorities are assessing whether existing regulatory approaches are fit for the purpose of regulating the financial operations of bigtechs.
The BIS (Bank for International Settlements) has published a new paper offering options to support authorities in their considerations on how to regulate bigtechs.
“Big techs are increasingly making inroads into finance. While big tech firms do not operate primarily in financial services, they offer them as part of a much wider set of activities,” the paper says.
“While financial services currently do not contribute a substantial amount to bigtechs’ overall revenues and mostly play a subordinated role in their business model, this has the potential to change rapidly due to their unique features and they could quickly become systemically important.”
The paper acknowledges the ability of bigtechs to make the financial sector more efficient, improve customer outcomes, and promote financial inclusion. However, it notes that bigtechs may also create or increase risks for financial stability and consumer protection, and comes with challenges for competition, data privacy and cyber security.
The paper highlights growing political momentum – such as in the US, EU and China – to adopt legislation to regulate bigtechs, particularly in the area of competition and antitrust. While such efforts are relevant, questions are “growing louder” as to whether the regulatory framework is commensurate to the risks bigtechs bring to the financial sector.
When providing financial services, bigtechs are generally subject to the same requirements as other market participants in terms of licensing to perform specific regulated activities. However, there are differences in regulatory treatment of banks and NBFIs that don’t currently apply to bigtechs, such as minimum capital requirements, group entity supervision, and ‘too big to fail’ rules.
Finance-specific regulations would also typically be geared towards individual legal entities within bigtech groups or specific activities and not the risks from possible spillover effects across all the activities they perform.
The paper also notes that bigtechs will normally not need any licence at all in cases where they operates through partnerships or joint ventures with incumbents, or where they provide financial services in collaboration with financial entities.
This modus operandi comes with risks and has the potential to be problematic because it can lead to unclear accountabilities, lower incentives for bigtechs to screen and monitor clients and activities, and generate excessive risk-taking behaviour – which could “impact the financial condition or reputation of the financial firms involved”.
“The policy approach up to now does not seem to pay due attention to the unique features of their business models and the corresponding risks,” the paper says.
Authorities are assessing whether their regulatory approaches for financial activities such as banking or payments are fit for the purpose of regulating the financial operations of bigtechs.
Based on this assessment, authorities may decide to enhance the current framework, which could mean recalibrating the mix of entity-based and activity-based rules, in favour of the former in certain policy areas. It could also include the introduction of a bespoke policy approach for bigtechs.
In light of the cross-sectoral and cross-border nature of bigtech activities, increased emphasis will likely be placed on cooperation and coordination at the local and international level, the paper says.
“The entry of bigtechs into finance calls for a comprehensive public policy approach that combines financial regulation, competition policy and data privacy.”
The full paper is available here.
The paper’s authors are Juan Carlos Crisanto, Johannes Ehrentraud and Marcos Fabian.