Regulators at the Gates

Financial services will look entirely different within 10 years.  For many, they will be unrecognizable.  The simultaneous disintermediation and selective re-intermediation of financial tools and products is creating new asset classes, new markets, funding innovation, and allowing citizens to bypass financial structures that are outdated, manipulated, inefficient or worse.

a man with a serious face

I recently had the opportunity to address financial ministers and diplomats from over 60 nations. While their invitation indicated a willingness to learn about the new financial markets and tools developing under their feet, the tenor of their questions causes a great deal of concern.

As I have watched the United States Securities and Exchange Commission flounder for years and deliberately delay passage of rules allowing equity crowdfunding for non-accredited investors – I have realized the potent force that securities regulators represent.  With some limited exceptions, they represent the old guard, attempting to regulate and secure dynamic new markets using models and frameworks developed for the era of teletypes, telephones and printing machines.

We have seen small steps forward in the crafting of “effective” regulation. By effective, I mean lightweight regulations that encourage the growth of alternative financial markets without imposing much cost, delay or compliance burden on small firms and individuals. 

The best available evidence shows that equity crowdfunding is operating globally with extremely little fraud.  The North America Securities Administrators Association now admits that their rhetoric over fraud was “overwrought and exaggerated.” Marketplace lending continues to thrive.  New models are allowing the transfer of funds and crowdinvesting throughout Africa. China was witnessing a mass migration away from banks and onto peer platforms even before their recent currency crisis and stock market devaluation.

So why then do we see a gathering of regulators at the gates of financial innovation? Why are warning bells ringing in many capitals, and policy makers discussing interventions into these markets? 

In the past six months, the tenor of conversations and emails to me from governments and policy makers has shifted dramatically.  Entrenched interests are starting to push for more regulation of peer lending platforms, and attacking some of the underlying alternative credit scoring models.  The hue and cry from banks is palpable – and understandable. The onslaught of regulation since 2008 has resulted in a very stable and arguable safer banking system – but at significant cost to the banks and therefore consumers. 

While many industry players in the USA are bracing for increased regulation from the Consumer Financial Protection Bureau, and still adjusting to the fallout from the Madden vs. Midland Funding case in the US, what many do not recognize is the level of discussion among national banks, governments and international bodies about the threat FinTech poses. We must brace ourselves for a backlash, and our best protection as an industry will be increased transparency.  Macroeconomics suggests we will soon see another recession – and this will be an opportunity for more regulation as some platforms and business models collapse.  The regulators are at the gates, ready to storm the castle.   In a few years, the FinTech new entrants will control trillions in transactions, but the battle is about to become bloody.

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