The COVID-19 pandemic accelerated the digitalization trend, elevating customers’ expectations, blurring traditional sectoral boundaries, and adding further urgency to digital transformation journeys. For financial institutions, it is critical to keep pace with advancements in digital technologies and to support an adaptive and dynamic culture. This is also the case for regulators and supervisors.
However, it is more than just a shared challenge and shared journey, it also an opportunity for the financial industry and for regulators to lead. Digitalization, and the increased reliance on advanced data analytics, present significant new policy issues that span industries and national borders, and financial regulators are best positioned to tackle and lead on these issues.
In an increasingly interlinked, data-driven global financial ecosystem, regulators face the difficult task of evolving with the pace of technological progress, while supporting their statutory objectives to preserve the integrity and stability of the financial system and protect consumers. Banks and insurers are adopting transformative technologies such as Artificial Intelligence (AI) and Cloud and are increasingly engaging with other technology partners across the ecosystem.
The IIF-Deloitte Realizing the Digital Promise series explored this topic, interviewing 200+ industry leaders and officials, and the magnitude of this challenge was encapsulated by a senior official at a national central bank in Europe:1
“Many banks still have legacy issues, and board members with four-year mandates who won’t touch the legacy in that time. On the other hand, we have Google who says they ‘refactor all their code every three years’, which is incomprehensible for most of the major and older banks. This presents a real challenge for us regulators to keep up with.”
This observation highlights three key issues.
It also underscores the emergence of new participants, services and dynamics in the ecosystem, such as Cloud Service Providers, and an increased focus on how data is stored, managed, processed, transferred and protected. The various national/ regional regulations and restrictions on data are key considerations now, in addition to the traditional prudential views of safety, soundness and compliance.
The intersection of regulators’ mandates and overlaps among agencies make for an increasingly complicated labyrinth. The importance of data in the new economy means that the scope of a traditional banking, insurance or securities supervisor now intersects heavily with that of privacy and competition commissioners. Leading technology analyst Benedict Evans recently cited a major European competition regulator who said, “We tell a tech company to do X, and then that afternoon the privacy regulator tells them not to.”2
We are at an interesting juncture—perhaps an inflection point—for how we approach international coordination and cooperation in regulation of financial services and beyond
This issue is amplified by the blurring of sectoral boundaries, for instance as BigTech firms increasingly move into financial services, with embedded finance and ‘banking as a service’ business models. Asymmetrical requirements such as ‘Open Banking’ have generated some competitive anomalies, and Bank of International Settlements General Manager Agustin Carstens highlighted the potential systemic importance of BigTech firms, with a potential need for additional supervisory oversight.3
These cross-sectoral issues arise in each jurisdiction and present an unenviable challenge for policymakers and supervisors. As each jurisdiction grapples with these under their own legal structures and political climates, this further complicates the ability to address these issues effectively at a global level. Nevertheless, it is critical that we face these difficult issues.
Internationally, digital divides are unfortunately deepening. Some governments limit market access for digital products and services, restrict data transfers and invoke protectionist barriers on digital designs. This further complicates efforts for international regulatory cooperation in an increasingly digitalized economy.
The digital age presents a renewed need for regulatory coordination and for refreshing regulatory mandates
We are at an interesting juncture – perhaps an inflection point – for how we approach international coordination and cooperation in regulation of financial services and beyond. The digital age presents a renewed need for regulatory coordination and for refreshing regulatory mandates.
Monetary Authority of Singapore Managing Director Ravi Menon has highlighted the absence of a rulebook for the global digital economy, suggesting that some of the U.S.-China tech tensions were attributable to the lack of “rules of the game.”4Menon has suggested the possible need for a ‘Digital Bretton Woods’, covering topics like data localization and digital services trade.
The adverse economic consequences of digital protectionism and data localization restrictions are well documented, and small businesses and gig economy workers may actually suffer some of the greatest impacts.5For financial institutions, these can also undermine efforts at holistic risk management and combatting fraud and financial crime. This is especially relevant for cloud and enhanced security capabilities, where financial institutions and their customers need access to the best in data protection and analytics – services that are commonly provided by specialist firms across borders.
Menon cites Singapore’s successful bilateral Digital Economy Agreements (initially with Australia, New Zealand and Chile) as a helpful step, but we need to elevate these to major economies and hopefully multilateral approaches. This also needs to be complemented by further efforts to renew and modernize international regulatory frameworks for the digital era.
Data and digitalization issues extend beyond financial services and beyond the traditional mandates of financial regulators. However, financial authorities are well placed to pick up the “free flow of data with trust” baton championed by Prime Minister Shinzo Abe during the G20 Leaders Summit in Osaka, and to include it in G7 and G20 arenas.
A consortium of major international companies (including IIF member firms Aflac, Citi, EY, Mastercard and Visa) have proposed that the G7 countries establish a ‘Data and Technology Forum’, which could mimic what the Financial Stability Board (FSB) did for financial services. Its proponents rightly highlight the need to modernize international regulatory structures to keep pace with digitalization and the blurring of sectoral boundaries.6This imaginative solution warrants consideration and the suggested use of the FSB as a template is significant. After all, while certain areas of regulatory fragmentation do persist, financial regulators have achieved a greater level of international cooperation and coordination than their peers in most other industries.
We also must be realistic and acknowledge that there is unlikely to be a singular data privacy and protection framework internationally, and that local values and attitudes can vary significantly. To this end, the objective should be for interoperability between national data regimes, as the APEC Business Council’s Financial Forum has backed – again, following many, of the precedents set by financial regulators in their approach to cross-border supervision.
Like our regulatory counterparts, the financial services industry has a similar opportunity and obligation to lead within the private sector. International inconsistencies in data and digital services regulations also adversely impact telecommunications, medicine and logistics industries, and banks and insurers can similarly champion the cause of interoperable solutions that can benefit the wider economy.
The rapid digitalization of the global economy adds urgency to these issues. Economic recovery and growth, especially in the midst of the pandemic, demand that we realize the opportunities of digital trade and cross-border data connectivity. As industry and regulators upskill, transform and adapt for the digital world, we should lead the effort to ensure these economic gains are realized.
Join The Discussion