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Global regulators fear ‘scale and pace’ of fintech growth is threat to financial system

Watchdogs abroad, and in the UK, are ‘sharpening their gaze’ when they look at fintech firms, says report.

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Global regulators are increasingly concerned the scale and pace of growth of fintech firms are in danger of causing “harm to consumers and risks to the financial system”.  

The rapid of growth across the world of this sector “is changing the way firms and consumers function is making it hard for regulators and risk experts to keep up”, according to a report published today by accountants KPMG.

The survey comes as Revolut faces a probe by UK watchdog, the Financial Conduct Authority, after the digital lender reported suspected money laundering activities on its network, it emerged last week.

UK-based Revolut has signed up 2.25 million users since launching in July 2015, making it one of the largest and fastest growing app-only banks in Europe. The challenger bank added, that its chief financial officer left the business at the start of the year.

UK regulators are “sharpening their gaze” at the fast-growing sector, according to the report, called the Regulation and Supervision of Fintech.

Three-fold risk

Fintech firms present a three-fold risk to the financial system, the survey said.

The rapid growth of a “relatively small” number of tech firms has led to “a highly concentrated market”.

Secondly, as the fintech industry grows there has been a “blurring of boundaries” between traditional financial services and other products such as digital wallets and store credit, which becomes harder for watchdogs to “segment and regulate”.

Finally, the survey added, the use of big data sets is new to many firms “and as some high profile cases have demonstrated, it is not a space with a margin for error”.

A number a BigTech players have faced calls for tough new legislation from politicians after selling consumer data to third parties without their customer’s knowledge. Facebook chief executive Mark Zuckerberg was forced to testify before the US Congress last April over the improper harvesting of data of 50 million of its users by British political consulting firm, Cambridge Analytica in the run-up the 2016 US presidential elections.

The KPMG report adds that regulators are looking at ways to combat a range of consumer and systemic risks around fintech such as cyber security, operational resilience, data privacy, consumer protection, company governance and anti-money laundering requirements.     

Robust regulation

KPMG UK head of financial services Jon Holt said: “Despite the bold, and ever changing world of technology, regulators continue to rely on demanding transparency; limiting the sale of products to retail customers; and re-writing conduct rules to apply to the latest fintech developments.”

He added: “In the UK, we wear robust regulation as a badge of honour and it is clear that regulators are turning to some familiar approaches when it comes to protecting consumers.”

The report added that established companies using cutting-edge technology should also understand the potential rewards on offer as well as the risks they are taking.

KPMG UK deputy chair Melanie Richards said: “It is vital that boards of established organisations have access to expertise on the big technology themes facing business right now. What risks does cloud computing present to your organisation? Do you understand the risks if artificial intelligence as well as the advantages it can deliver? To challenge the executive effectively, the Board needs to understand these issues and the impact tech innovations can have – both positive and negative.”

Last month, global regulatory body the Financial Stability Board (FSB) said it was concerned BigTech, through its deep pockets and economies of scale, could dominate parts of the financial services industry and threaten financial stability.

The FSB, which comprises regulators and central bankers from the G20 economies, inroads made into financial services by huge players such as China’s Alibaba and Google and Amazon in America, “could materially alter the universe of financial services providers”.

It added: “This could in turn affect the degree of concentration and contestability in financial services, with both potential benefits and risks for financial stability.”

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