On February 19, the Basel Committee on Banking Supervision (BCBS), the primary global standard setter for the prudential regulation of banks, released its final report, “Sound Practices: Implications of fintech developments for banks and bank supervisors.” The report—issued after BCBS’ consideration of comments received in response to its August 2017 consultative document of the same name (see previous InfoBytes coverage on the August consultative document here)—provides BCBS’ current assessment of how fintech may shape the banking industry in the near term. The report summarizes BCBS’ analysis of historical research, data compiled from surveys of BCBS members’ frameworks and practices, and other industry feedback, and provides several key considerations for banks and bank supervisors in this space.
The report identifies a common theme across various scenarios: the emergence of fintech may make it increasingly difficult for banks to maintain their existing operating models due to changes in technology and customer expectations. The BCBS stressed that as a result of the “rapidly changing” nature of banks’ risks and activities due to fintech developments, the rules governing these risks may need to evolve. Accordingly, the BCBS recognized that “it should first contribute to a common understanding of risks and opportunities associated with fintech in the banking sector by describing observed practices before engaging in the determination of the need for any defined requirements or technical recommendations.” It further acknowledged that “fintech-related issues cut across various sectors with jurisdiction-specific institutional and supervisory arrangements that remain outside the scope of its bank-specific mandate.”
Additionally, the current report identifies five forward-looking scenarios describing the potential impact of fintech on banks:
- “The better bank: modernisation and digitisation of incumbent players”;
- “The new bank: replacement of incumbents by challenger banks”;
- “The distributed bank: fragmentation of financial services among specialised fintech firms and incumbent banks”;
- “The relegated bank: incumbent banks become commoditised service providers and customer relationships are owned by new intermediaries”; and
- “The disintermediated bank: banks have become irrelevant as customers interact directly with individual financial service providers.”
With this issuance, revised to reflect the feedback BCBS received on its August consultative paper, BCBS has provided several “sound practices” for banks and bank supervisors to consider, along with its final ten key implications of fintech, as well as ten key considerations. Some notable considerations include:
- Banks should have appropriate, effective governance structures and risk management processes to address key risks that may arise due to fintech developments, which may include staff development processes to ensure bank personnel are appropriately trained to manage fintech risks, as well as the development of risk management processes compliant with portions of the BCBS’s Principles for sound management of operational risk that relate to fintech developments.
- Banks should implement effective IT and other risk management processes to address the risks and implications of using new enabling technologies. Bank supervisors should also “enhance safety and soundness by ensuring that banks adopt such risk management processes and control environments.”
- Bank supervisors should understand the implications of the growing use of third parties, via outsourcing and/or partnerships, and maintain appropriate due diligence processes, which should “set out the responsibilities of each party, agreed service levels and audit rights” when contracting with third-party service providers.
- Bank supervisors should communicate and coordinate with public authorities responsible for the oversight of fintech-related regulatory functions that are outside the purview of prudential supervision, including safeguarding data privacy, cybersecurity, consumer protection, and complying with anti-money laundering requirements. The recommendation removes the phrase “whether or not the service is provided by a bank or fintech firms,” which was contained in the August consultative document.
- Bank supervisors should coordinate global cooperation between banking supervisors when fintech firms expand cross-border operations to enhance global safety and soundness by engaging in appropriate supervisory coordination and information-sharing. Recently, on February 19, the U.S. Commodity and Futures Trading Commission and the United Kingdom’s Financial Conduct Authority signed an agreement outlining a commitment to collaborate and support each regulator’s efforts to encourage responsible fintech innovation; monitor development and trends; and obtain more effective and efficient regulation and oversight of the market. (See previous InfoBytes coverage here.)
- The report stresses the importance of collaboration between bank regulators, specifically in jurisdictions where non-bank unregulated firms are providing services previously conducted by banks. The BCBS further notes that bank supervisors should review existing supervisory frameworks to consider whether potential new innovative business models can evolve in a manner that has appropriate banking oversight but does not unduly hamper innovation.