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How policymakers can encourage responsible innovation


Looking back at the unprecedented events of the past year, policymakers are sure to note the remarkable power of technology, both to do good and to fuel destructive forces.

They should also recognize their authority to shape these outcomes and the compelling need to do so, particularly with financial technology.

The devastation of the coronavirus pandemic and its disparate economic toll, the ravages of climate change, political upheaval and racial injustice all converged in 2020. But the pivotal role of technology has been one of the most important takeaways.

We have seen phenomenal progress using technology to solve problems including the record-time development of new COVID-19 vaccines, and the ability to leverage satellite imagery to predict the impact of climate in communities.

For financial services, technology innovation is already expanding low-cost financial services for consumers, including automated approaches to personal financial management and safe and affordable credit access through cash-flow underwriting. We’ve also seen online banks with lower fees, faster access to money and a better customer experience.

But with all innovation comes new risk and we must be prepared to identify, measure and address dangers that the digital transformation of financial services has introduced. This includes bias in artificial intelligence that can perpetuate discrimination; data usage without adequate privacy and security that can lead to abuse; gamification of investments that might not be in the best interest of some consumers; and the emergence of cryptocurrency and central bank digital currencies that could disrupt fiat currency. There’s also the shrinking footprint of community banks and credit unions partly due to intense digital competition that could leave rural and other hard-to-serve communities abandoned.

The purpose of regulation is to yield better outcomes for the financial system. However, after decades of well-intentioned laws and policies aimed at addressing these objectives, we have not successfully moved the needle for vulnerable consumers. This leads to a deep concern about the inequities inherent in the current system, which currently works for some, but fails for many.

The benefits of responsible technological innovation can’t be ignored. It can help produce a fairer financial system, one that reduces discrimination and financial crime, with accessible and affordable financial products for the most vulnerable populations. Policymakers should encourage responsible innovation, where risks are appropriately managed, to solve intractable problems.

Meanwhile, the pace of technological change is exponential and policy choices made — or avoided — will dictate outcomes for consumers and the financial system for decades. In this evolving ecosystem, regulators play a critical role to ensure that technology is used for good.

Regulators need to work collaboratively with the private sector to understand and identify these emerging risks. Then they can establish principles, guardrails and clear rules to direct and focus innovation in ways that will protect consumers and financial stability.

One government actor developing a new model of ecosystem collaboration is the UK Financial Conduct Authority.

The FCA made fostering regulatory innovation a primary goal during the last six years, as the Alliance for Innovative Regulation (AIR) recently documented in a white paper.

The FCA’s commitment to financial innovation is evidenced by its 100-plus-person innovation division, and more than 40 data scientists in business units throughout the agency. The FCA was also a global leader in pioneering innovative public-private partnerships through so-called TechSprints, sandboxes and a new pilot digital sandbox.

Today, the risk of not innovating is often greater than the unintended consequences associated with innovation. But aversion to change can itself create risk, where regulators find they lack the tools and data analytics to effectively supervise increasingly tech-enabled and digitized firms.

Because of its groundwork leading up to the pandemic, the FCA was prepared to tackle regulatory and supervisory challenges in new virtual circumstances, readily shifting to off-site monitoring and launching additional tools to encourage innovation.

For example, the pandemic has had a disproportionate effect on women. To address this, the FCA (working with AIR), recently hosted a global TechSprint on “Women’s Economic Empowerment,” with a demonstration of proposed digital solutions to increase financial inclusion.

Financial technology is neither good nor bad. Its impact depends on how it is deployed. However, the current regulatory system is not designed to manage the exponential rate of technological change that threatens to significantly outpace policy responses. A failure to understand new technologies can lead to lost opportunities in encouraging beneficial innovation and reining in harmful practices.

We face a critical juncture in policy approach to financial services where leaders must determine whether to truly understand the tech transformation taking place and proactively harness it for the better, or avoid the technology path altogether.

To protect consumers and the stability of the financial system, regulators should work side by side with innovators to study, understand and identify risk. This creates more effective regulation of new technologies to mitigate that risk — without strangling innovation. The FCA has demonstrated several approaches to fostering responsible technology in the interest of consumers. We hope that regulators around the world take note and follow its example.