Regulators need to stay agile to control risks that come with fintech innovation: panel

[ABU DHABI] Regulators need to stay agile and leverage experiences to control the risks that will naturally arise from innovations in the financial-services space, panellists at the Abu Dhabi Finance Week 2022 said on Tuesday (Nov 15).

While legislations tend to lag behind innovations, the role of regulators cannot be overlooked – especially with rising risks in the cryptocurrency space, said speakers at a panel on how regulators are responding to innovation. The talk was part of an investment and finance forum held in Abu Dhabi from Nov 14 to 18.

The panellists were Caroline Pham, commissioner of the US Commodity Futures Trading Commission (CFTC); UK Sinha, former chairman of the Securities Exchange Board of India (SEBI); Kwok Wai Lum, senior executive director of authorisation and fintech at Abu Dhabi Global Market’s (ADGM) Financial Services Regulatory Authority; and Giuseppe Siani, the director general for financial supervision and regulation at the Bank of Italy. The panel was moderated by Salim Essaid, business correspondent at news website AI-Monitor.

Siani noted that regulators face various challenges such as costs, legal issues, the lack of talent and a significant increase in IT-related risks. At the Bank of Italy, following the European process also makes regulation a complex and long process.

“But it allows us to incorporate lessons learnt from experience, and also from innovative channels that we have developed,” Siani said.

ADGM’s Kwok also noted the importance of striking a balance as a regulator. He said: “If our rules and regulations are not agile enough to reflect market realities, we lose our relevance … But we cannot do away with our institutional character as the regulator because we will lose the credibility.”

To address this issue, Kwok highlighted an example of how the ADGM launched a discussion paper on decentralised finance in April, to share its thoughts of how to regulate the space, as well as to pull views from the industry.

“The idea is to work with the global community to evolve the areas that we can potentially regulate,” Kwok said.

SEBI’s Sinha noted that the Indian government has encouraged fintech innovation by offering basic infrastructure to the public. For instance, India Stack is a set of open application programming interfaces (APIs) that are offered as basic goods.

But he also emphasised that innovation should be able to reach the largest section of the society who do not have access to financial services.

The panellists also discussed the turbulence in the crypto space.

With rising risks related to crypto, CFTC’s Pham said it is “more imperative than ever” for businesses to focus on risk management.

“Besides that, we have to ensure that these crypto financial activities are brought within the regulatory perimeter so that they are held to the same standards as other financial firms,” she added.

Pham noted that the pace of innovation often times outpaces the speed of legislation or regulation. But she said the US’ approach – where regulators have been delegated the authorities and tools to address their respective markets – is likely working for its market, having “clearly unlocked American innovation”.

Innovation and growth make processes much more efficient, but regulators and companies alike should never forget about the risks that come with, said Bank of Italy’s Siani, adding: “The regulation is just a way of implementing principles that should be adopted by firms in the first place.”