Sergey Nivens - Fotolia
The Financial Stability Board (FSB), which observes the global finance sector and provides guidance about regulations that are needed to protect it, has added financial technology (fintech) to its list of things to keep an eye on.
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The international organisation – currently chaired by Bank of England head Mark Carney – outlined its priorities for 2016, which included a closer look at the risks fintech companies might bring to the global finance system.
In the letter to G20 finance ministers, Carney said the FSB will be: “Assessing the systemic implications of financial technology innovations, and the systemic risks that may arise from operational disruptions.”
According to the Financial Times, Carney wrote: “A number of technological innovations with potentially transformative implications for the financial system, its intermediaries and users are now receiving close attention.”
“The regulatory framework must ensure it can manage any systemic risks that arise from technological change without stifling innovation.”
“The FSB is evaluating the potential financial stability implications of emerging fintech innovation for the financial system as a whole. We are also working with standard setters that are monitoring developments in their respective sectors.
“We are working to better understand the potential impacts on financial stability of operational disruption to core financial institutions or infrastructure.”
Online finance increases share of market
There are a large number of fintech companies offering financial services that have quickly built up large customer bases. Peer-to-peer lending is a good example, and IT platforms that link lenders and borrowers together have grown at explosive rates.
According to research by from Cambridge Judge Business School and innovation charity Nesta, alternative online finance – such as peer-to-peer lending and crowdfunding – increased its share of the market for financing businesses in 2015, providing around 3% of all lending to small to medium-sized enterprises (SMEs) and 13% to small businesses.
But traditional finance firms that are heavily regulated have said they are at a disadvantage as a result. Former Financial Services Authority chairman Adair Turner recently told BBC Radio 4’s Today programme: “The losses which will emerge from peer-to-peer lending over the next five to10 years will make the bankers look like lending geniuses.”
Turner said he is worried that there are no checks on whether the individuals and businesses who borrow will be able to pay back their loans. “You cannot lend money to SMEs in particular without somebody doing good credit underwriting,” he said.
Read more about alternative finance firms
- Peer-to-peer lending accounted for more than £1.2bn of UK loans in 2014, with confidence growing among businesses and individuals in IT-enabled access to credit.
- Cloud-based UK peer-to-peer lending platform MarketInvoice is moving to a Microsoft Azure-based platform as a service (PaaS) to cope with demand.
- Internet giants will not try to replace banks, but will disrupt the sector through services that take consumers away from traditional banks, says Forrester.
At the same time, regulators in the UK are encouraging innovation in financial services, including approving new banks.
The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have jointly launched the New Bank Startup Unit to provide information and support to firms attempting to become banks. They are working with startup banks to help them get approval and ensure they do not present a risk to consumers of the finance system.