The Basel Committee on Banking Supervision (Basel Committee) has published a consultative document that is intended to provide a forward-looking perspective on Fintech and its potential impact on the banking industry. The consultative document combines historical research, analysis of current media and industry periodicals, surveys on Basel Committee members’ activities, Fintech product analysis and scenario analysis. Based on this work, the Basel Committee sets out in the consultative document 10 key observations and related recommendations on supervisory issues for consideration by banks and bank supervisors.
The 10 recommendations are:
- banks and bank supervisors should consider how they balance ensuring the safety and soundness of the banking system with minimising the risk of inadvertently inhibiting beneficial innovation in the financial sector. Such a balanced approach would promote the safety and soundness of banks, financial stability, consumer protection and compliance with applicable laws and regulations, including anti-money laundering and countering the financing of terrorism (AML/CFT) regulations, without unnecessarily hampering beneficial innovations in financial services, including those aimed at financial inclusion;
- banks should ensure that they have effective governance structures and risk management processes in order to identify, manage and monitor risks associated with the use of enabling technologies and the emergence of new business models and entrants into the banking system brought about by Fintech developments. These structures and processes should include: (i) robust strategic and business planning processes that allow banks to adapt revenue and profitability plans in view of the potential impact of new technologies and market entrants; (ii) sound new product approval and change management processes to appropriately address changes not only in technology, but also in business processes; (iii) implementation of the Basel Committee’s Principles for sound management of operational risk with due consideration to Fintech developments; (iv) monitoring and reviewing of compliance with applicable regulatory requirements, including those related to consumer protection, data protection and AML/CFT when introducing new products, services or channels;
- banks should ensure they have effective IT and other risk management processes that address the risks of the new technologies and implement the effective control environments needed to properly support key innovations;
- banks should ensure they have appropriate processes for due diligence, risk management and on-going monitoring of any operation outsourced to a third party, including Fintech firms. Contracts should outline the responsibilities of each party, agreed service levels and audit rights. Banks should maintain controls for outsourced services to the same standard as the operations conducted within the bank itself;
- bank supervisors should cooperate with other public authorities responsible for oversight of regulatory functions related to Fintech, such as conduct authorities, data protection authorities, competition authorities and financial intelligence units, with the objective of, where appropriate, developing standards and regulatory oversight of the provision of banking services, whether or not the service is provided by a bank or Fintech firms;
- given the current and potential global growth of Fintech companies, international cooperation between supervisors is essential. Supervisors should coordinate supervisory activities for cross-border Fintech operations, where appropriate;
- bank supervisors should assess their current staffing and training models to ensure that the knowledge, skills and tools of their staff remain relevant and effective in supervising new technologies and innovative business models. Supervisors should also consider whether additional specialised skills are needed to complement existing expertise;
- supervisors should consider investigating and exploring the potential of new technologies to improve their methods and processes. Information on policies and practices should be shared among supervisors;
- supervisors should review their current regulatory, supervisory and licensing frameworks in light of new and evolving risks arising from innovative products and business models. Within applicable statutory authorities and jurisdictions, supervisors should consider whether these frameworks are sufficiently proportionate and adaptive to appropriately balance ensuring safety and soundness and consumer protection expectations with mitigating the risk of inadvertently raising barriers to entry for new firms or new business models; and
- supervisors should learn from each other’s approaches and practices, and consider whether it would be appropriate to implement similar approaches or practices.
In addition to setting out banking industry scenarios in the consultation document, the Basel Committee sets out three case studies that focus on technology developments (big data, distributed ledger technology and cloud computing) and three Fintech business models (innovative payment services, lending platforms and neo-banks).
The deadline for comments on the consultative document is 31 October 2017.