Entity-based Regulation Needed to Address Bigtech Risks: BIS

China’s financial holding company regime represents a novel entity-based regulatory approach for big techs, says a new BIS research paper. 

The Financial Stability Institute has published a new paper highlighting the need for new policy developments to address the risks from big techs as they continue to gain presence in the financial system.

The paper reviews regulatory initiatives in China, the EU and US to address the challenges presented by big techs, focusing on five policy domains: competition, data, business conduct, operational resilience and financial stability.

“These initiatives generally seek to achieve a balance between addressing the different risks posed by big techs and preserving the benefits they bring in terms of market efficiency and financial inclusion,” the paper says.

Competition, it says, has so far been the policy area where the most initiatives have been conducted and a “paradigm shift” is emerging.

“Given the large potential for big techs to abuse their technological and data superiority to quickly dominate different market segments and adopt anti-competitive practices, preserving market contestability has become a top priority for authorities.”

Competition policy proposals in China, the EU and US include the augmentation of traditional ex post enforcement tools as well as the creation of new big tech-specific ex ante regulatory regimes.

The paper also notes that a number of data protection and data-sharing initiatives have been proposed, potentially paving the way for “generalised use of personal data” for the provision of financial services by different types of entities.

The paper also describes policy initiatives in the areas of business conduct, operational resilience and financial stability – including China’s financial holding company (FHC) regime.

Introduced in September 2020, the regime requires entities holding two or more types of financial institutions to be structured and licensed as FHCs if they meet certain size thresholds or other conditions. So far three companies have applied for FHC licences.

“This effectively mandated big techs to reorganise their financial business and represents a novel entity-based regulatory approach that entails a comprehensive oversight of the activities performed by big techs through all their financial subsidiaries,” the paper says.

Still, the paper says, additional regulatory responses might be needed to comprehensively address big tech risks, where new policy action is likely to follow an entity-based approach and require close cooperation between competition, data and financial authorities.

“Moreover, given the cross-border scope of big tech activities, enhanced international regulatory cooperation is essential.”

The full report is published here.

The Financial Stability Institute was jointly created in 1998 by the BIS (Bank for International Settlements) and BCBS (Basel Committee on Banking Supervision) to assist supervisors in improving and strengthening their financial systems.

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