Financial Stability Institute chair Fernando Restoy discussed the debate over how regulation should evolve to encourage fair competition between traditional banks and new fintech and big tech players in a recent Bank for International Settlements paper.
Some advocate moving from an entity-based to an activity-based regulatory approach under the principle “same activity, same regulation”. However, there is only limited scope for further harmonizing the requirements for different players in specific market segments without jeopardizing higher-priority policy goals.
In fact, there seems to be a strong case for relying more, and not less, on entity-based rules. The regulatory framework should incorporate entity-based requirements for big techs in areas such as competition and operational resilience that would address the risks stemming from the different activities they perform. This strategy would not only help regulation to achieve its primary objectives, but would also serve to mitigate competitive distortions.
Fostering a level playing field is not the primary objective of financial regulation. Public policy goals such as financial stability, market integrity and consumer protection rank first in the order of priorities. Moreover, equating the conditions to be satisfied by different types of player in particular market segments would not always promote more competitive markets. Therefore, achieving a level playing field would only be desirable if higher-priority policy objectives are ensured.
In some policy domains, such as consumer protection or AML/CFT, an activity-based approach may well be adequate enough to achieve primary objectives. Yet in others, such as financial stability, an entity-based approach is indispensable. In a third group of policies, such as those on operational resilience and competition, regulations require a combination of activity- and entity-based rules, addressing the specific risks that different types of players can generate to meet those policy objectives.
Therefore, regulation may create unwarranted competitive distortions in two ways: first, by introducing specific entity-based obligations for a specific set of competitors on policy areas in which an activity-based approach could deliver the desired objectives; and second, by imposing specific obligations on some but not all types of players for which entity-based rules would be warranted on higher-priority policy grounds.
The existing regulatory framework in major jurisdictions does tend to impose comparable rules for consumer protections and AML/CFT on all relevant providers of financial services. Yet supervision and enforcement of these rules may be different across different types of entities that provide the same services. A functional – as opposed to a sectoral – organization of financial supervision may help eliminate those unwarranted discrepancies and contribute to a more level playing field.
In the area of AML/CFT, heightened vigilance of new, non-bank players’ activity seems essential in order to address current challenges in ensuring market integrity, as well as to mitigate distortions created by differences in the effective regulatory burden experienced by different types of entity.
The situation is different in policy areas for which entity-based rules may be appropriate. Despite recent progress, rules aimed at ensuring the adequate operational resilience of traditional financial institutions – such as banks and insurance companies – are generally more stringent than those for other entities. As things move forward, and some big techs continue to increase their presence in the financial services market, their operations may acquire systemic importance. This should be acknowledged by the regulatory framework. A complication is that they operate across a range of financial and non-financial business lines, thus requiring cooperation across different authorities.
Finally, with regard to competition, the potential of big techs to achieve a dominant position and to use that position to adopt anti-competitive practices may deserve specific action. An entity-based regulation targeting those risks, including rules that facilitate comprehensive and efficient data-sharing, seems a promising strategy