The Basel Committee on Banking Supervision released a consultation document on the implications of fintech, discussing how it will impact banks and bank supervisors in the near to medium term. The consultation document set out ten key observations and recommendations:
- Ensuring safety and soundness and high compliance standards without inhibiting beneficial innovation in the banking sector: The Basel Committee considers this is a balancing exercise between financial stability, soundness of banks, consumer protection and compliance, and, beneficial innovations, which may lead to greater financial inclusion.
- Key risks for banks related to fintech include strategic, operational, cyber and compliance risks: Managing key risks requires the implementation of effective governance structures and risk management processes responsive to new technologies, business models and banking system entrants. Risk management principles recommended for banks include having structures and processes to manage strategic planning in place (ie, allowing banks to adapt revenue and profitability forecasts to new technologies and market entrants) and adapting product approval and change management processes to address dynamic business processes.
- Implications for banks of the use of innovative enabling technologies: Effective IT and other risk management processes are required to address risks of new technologies and implement effective control environments.
- Implications for banks due to growing use of third parties, via outsourcing or partnerships: This requires there be appropriate processes for due diligence, risk management and ongoing monitoring of outsourced functions, with contracts to establish party’s responsibilities, agreed service levels and audit rights.
- Cross-sectoral cooperation between supervisors and other relevant authorities: The Basel Committee considered issues posed by fintech are not only prudential issues but pose other public policy issues (ie, privacy, data and IT security, consumer protection, competition and AML/CTF) and this will require cooperation between regulators with different regulatory functions.
- International cooperation between banking supervisors: This recommendation was made in light of the Basel Committee finding some fintech firms (particularly those offering payments and cross-border remittance services) already operated in multiple jurisdictions and there was a high likelihood that these firms would expand their cross-border operations in the near future (particularly in relation to wholesale payments).
- Adaptation of the supervisory skillset: The Basel Committee considered that bank supervisors will need to assess their current supervision models to adapt to fintech-related developments. This will involve assessing current staffing and training models to ensure knowledge, skills and tools of staff remain relevant.
- Potential opportunities for supervisors to use innovative technologies: As regulators in Australia have been embracing regtech, the Basel Committee recommended supervisors consider investigating and exploring fintech solutions to improve methods and processes.
- Relevance of existing regulatory frameworks for new innovative business models: The Basel Committee recommended bank supervisors review regulatory, supervisory and licensing frameworks in light of new and evolving risks posed by fintech. Bank supervisors should consider whether such frameworks are both sufficiently proportionate and adaptive.
- Key features of regulatory initiatives set up to facilitate fintech innovation: This concerned a common aim amongst bank supervisors to strike a balance between financial stability, consumer protection and innovation, with the Basel Committee noting bank supervisors had adopted significantly different models to facilitate innovation. The Basel Committee recommended bank supervisors learn from each other’s different models in this respect.
The consultation document found that a common theme, across various scenarios which were tested by the Basel Committee, was that banks will find it increasingly difficult to maintain their current operating models as a consequence of technological change and customer expectations. The consultation document is an invitation to both banks and bank supervisors to adapt their models for imminent technological and structural change.