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Regulators try a friendlier approach to fintech

To keep pace with the ever-changing state of fintech, FINRA has opened up a new office that will serve as the regulator’s hub regarding technological issues.

“The main idea behind the office is the realization that financial innovation and technology are really changing the landscape of how the securities industry operates,” says Haimera Workie, who was appointed to head up the Office of Financial Innovation. He added: “We thought it was important to have a group that tries to understand some of these changes.”

The new office is an outgrowth of the pre-existing Innovation Outreach Initiative, which was established mid-2017 to help the regulator better understand fintech innovations and their impact on the industry.

While that initiative started dialogue at FINRA, this new office will “be something permanent in the organization to look at these issues on a going-forward basis and devote resources to that,” according to Workie, who is seeking to hire additional staff members for the office.

Workie and his peers will proactively reach out to firms through a fintech industry committee to discuss new developments and ask questions around technologies including artificial intelligence, machine learning and robotic automation, he says. The team will work closely with the SEC, and is also working with international regulators, including the FCA and ESMA.

Regulatory action in this area has been somewhat limited, and primarily focused on digital assets. The SEC did take first actions targeting digital investment offerings when it charged two robo advisors In December.

However, the SEC has also recently expressed interest in better understanding the technology landscape as it relates to financial services. It launched FinHub, the Strategic Hub for Innovation and Financial Technology, in late 2018 in order to engage with the public regarding distributed ledger technology, automated investment advice, digital marketplace financing and artificial intelligence and machine learning. The site provides historical regulatory action taken, information, speeches and opportunities for public input. This May, FinHub is hosting a public forum around cryptocurrencies.

Regulatory action against robos April 29, 2019

Some leaders at the regulators have shown concern that their firms may inhibit innovation.

“We should avoid the temptation to supplant the market’s product testing with our own,” SEC commissioner Hester Peirce, sometimes referred to as “cryptomom,” said in a speech at the end of 2018. “We will seldom be able to identify viable innovations with any certainty ex ante, and it may in fact be impossible to ascertain the benefits and risks of new technologies and products in advance of their release. We should resist the temptation to treat uncertainty as a disqualifier, and we should welcome the opportunity for investors to determine the value of these innovations for themselves in our regulated markets, where they can benefit from the transparency and rules that govern market interactions.”

Workie says FINRA sees the benefit and opportunity of fintech.

“The way I look at it: Innovation has the potential to really help investors and has the ability to help the market itself if done correctly,” Workie says. “It’s balancing those potential benefits with the need to understand what the potential risks may be.”

Understanding the potential risks of fintech in the marketplace will take time. “I don’t think there’s a beginning and end stage. I think it’s an ongoing process,” Workie says.

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