Financial services regulators failed to prevent the credit crunch which brought global economies to their knees, but they are determined to avoid future problems that could be caused by out-of-control technological advancement, such as financial exclusion and increased opportunities for cyber criminal.
The Government Office for Science recently published a report into the adoption of new technology-based financial services platforms and warned that although these services – often referred to as fintech – will “democtratise financial services”, they bring with them serious risks.
“There are dystopian scenarios for the evolution of fintech, with the possibility of increased financial exclusion and exploitation of large numbers of people, new opportunities for financial crime, and destabilisation of existing mechanisms that provide monetary policy and stability,” said the report.
Regulators are formulating policies to make sure the financial services sector has competition through technology-based advances, is accessible to all and remains secure.
The Financial Conduct Authority (FCA) recently said its focus on technology will remain for years as it attempts to protect consumers and reduce risks to the market while supporting technology innovations that will benefit consumers.
In its Business Plan (2015/16), the FCA featured technology heavily. This is not surprising in light of the digital revolution taking place in the finance sector. New financial service providers are being launched and are offering consumers and businesses access to loans, current accounts, payment services as well as financial information services. Regulators need to keep on top of a fast-changing sector.
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“We face the challenge of balancing the steps we take to reduce conduct risks related to technology, while ensuring that the regulatory regime supports the development of innovations that can bring benefits to consumers," said the FCA. "We are committed to ensuring that our rules keep pace with technology, while acknowledging that this will be a challenge."
The FCA added that although digital channels, such as mobile banking, digital wallets, cheque imaging and price comparison websites can make financial services more convenient, increase competition and reduce costs, they can increase security and resilience risk.
“Widespread adoption of innovative technologies across a range of firms – from large retail banks and insurers to challenger banks and new startups – may present benefits to consumers, but can also increase the risk of harm to customers and market integrity if the pace and complexity of digital transformation is not effectively managed,” said the regulator.
Computer Weekly has recently outlined some of the new financial services providers entering the market. These include new banks targeting specific customer bases, as well as technology companies offering online services, such as product comparison sites and peer-to-peer lending platforms.
The FCA business plan also outlined some of the challenges facing traditional banks as a result of their legacy IT systems.
“A significant amount of ongoing technological investment is required to enter or continue being present in a market. The complexity and cost of such systems encourages firms to modify existing systems to deliver new functionality rather than replace them," it said. "As a consequence, systems may become increasingly complex, less resilient and potentially less secure.”