The governor of the Bank of England Mark Carney prompted consternation amongst the alternative finance industry with a stark warning this week.
Financial regulators around the world should beware the risk of the rapid rise in alternative financial structures such as P2P and other online lending firms as well automated wealth management or ‘robo advice’ , according to the governor of the Bank of England Mark Carney.
Speaking at a G20 meeting in Germany, Carney highlighted the potential systemic risks that could underpin a new financial order given the rapid growth in technology powered financial sectors such as P2P lending and robo-advice.
Carney, whose stark warnings of the ramifications of Brexit on the economy last year as well as a more recent U-turn have led to criticisms by some MPs in recent months, said fintech’s continued growth could eventually threaten wholesale banking and trading markets.
In the scenario of further growth of areas of the market such as robo-advice, where risk management algorithms are commonly used, it may lead to excess volatility or increase pro-cyclicality as a result of herding, particularly if the underlying algorithms are overly sensitive to price movements or highly correlated to each other, he said.
Whilst Carney did also add that a more diversified investor mix could be a good thing he said “a new financial system for a new age” meant that “some innovations could generate systemic risks through increased interconnectedness and complexity through greater herding and liquidity risks, more intense operational risk and opportunities for regulatory arbitrage.”