Overcoming Barriers to Growth in Financial Regulation

Regulation | Dec 2, 2024

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Roadmap for Agile and Innovative Regulators

As new technologies and innovation continually change industries, regulators themselves must adapt or risk falling behind.  Without innovating, regulators may inadvertently stifle economic growth and expose markets to new threats, so embracing change should be accepted as a way to keep the system resilient.  In a recent Linkedin article called 'Mandate to Innovate, Stephen Scott CEO Starling shared some insights on how regulators can build trust and inspire innovation, and rethink how regulations can support growth, competitiveness, and stability.

Breaking Barriers and Embracing Innovation

Regulators need to change how they approach new technologies like blockchain, artificial intelligence (AI), or decentralized finance (DeFi). Rather than being skeptical and cautious, they should adopt a mindset that welcomes experimentation even if some risks are involved.  Shifting risk-adverse cultural attitudes is key to fostering innovation.  The UK Science Secretary, for example, setup a Regulatory Innovation Office to speed up approvals and cut unnecessary bureaucracy to help companies and public agencies innovate more easily.

Regulators need to support growth and innovation without compromising financial stability.  This means they need to adopt new tools and frameworks that are suitable for emerging technologies like AI, and invest in RegTech and SupTech to improve supervisory capabilities and decision-making.  The European Central Bank's (ECB) 2024-2028 tech strategy is about investing in both people and technology to provide supervisors with the right tools and skills (training) and to upgrade its IT systems to meet future demands.

See:  Balancing Fintech Innovation and Regulation

This is all part of the ECBs SSM Digitalisation Blueprint launched by the supervisory board in 2020 to (a) build innovative tools and systems, (b) develop a common IT landscape, (c) foster 'digital culture', (d) run an advanced 'innovation model' at the SSM, and (e) support innovation in the wider ecosystem of the private sector, academia and other authorities.  It's the ECBs commitment to using advanced supervisory technology to streamline processes and modernize.  Also, initiatives like the FUTURES Act in the U.S. are advocating for regular reviews of supervisory tools to ensure they are up to date, adaptable, and support effective oversight.

Another effective way to drive innovation is by creating spaces where it can thrive such as innovation offices and regulatory sandboxes where financial products and services can be safely tested before they are fully implemented.  American is moving in this direction with the proposed Financial Services Innovation Act of 2024, which would establish specialized offices and sandboxes within federal financial regulators.

Accept failure as a valuable learning tool instead of viewing it negatively.  The OECD clearly sees it better for regulators to see failure as a step towards success ('Learn to fail, not fail to learn').  A failed experiment can result in smarter policies in the long run, often preventing bigger mistakes in the future.

Collaboration is just as important.  Regulators should work closely with financial institutions and other stakeholders to share insights and develop best practices.  For example the UK Prudential Regulation Authority (PRA) recently held a pilot roundtable with banks, insurers, and other experts to explore how regulation can safely enable innovation.

Agile Regulator Scorecard

How well do you think your regulators would score?  10 point scale with 1 (lowest) and 10 (highest)

1. Overcoming Cultural Barriers
2. Balancing Innovation with Stability
3. Setting up Innovation Offices and Sandboxes
4. Investing in Regtech and Suptech
5. Promoting Collaboration and Learning
6. Allowing Failure
7. Updating Internal Systems and Mindsets

Final Thoughts

To truly embrace innovation, regulatory leaders must set the tone by creating an environment where trying new things is encouraged and not feared.  Regulators need the right tools and training to keep up with new technologies and changing markets.

See:  Innovative Approaches to Smarter Regulation

Outdated systems won't cut it any longer.  Regulators need to invest in a modern tech stack and build agile and skilled teams.  Finally, collaboration and bold thinking are keys to unlocking growth.  With the right approach, regulators can drive growth while balancing stability.

The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, artificial intelligence, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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