Introducing a pro-competitive paradigm for fintech regulation

Oscar Borgogno - University of Turin and Bank of Italy;

Giuseppe Colangelo - University of Basilicata and Stanford Law School

-- The increasing pace of FinTech development has triggered a worldwide race among policy makers to overhaul their own regulatory landscape in order to be as innovation friendly as possible. Consequently, a vast array of new tools and regulatory practices have emerged over recent years, threatening to disrupt traditional approaches to regulation. This raises the need to figure out the true potential of each allegedly new practice to avoid any confusion between original, far-reaching avenues of market regulation and rebranding of old ideas prompted by legal marketing considerations.

In our paper ‘Regulating FinTech: from legal marketing to the pro-competitive paradigm’, we put these newly arisen tools into a systematic framework by distinguishing three different, but not mutually alternative strategies: laissez-faire, functional regulation and tailored regulatory strategies. This last one requires regulators to identify the original features of specific market developments and accordingly design pieces of regulation, tailored on such new technology-enabled functionalities. In our view, this strategy represents the Pandora’s box from which the largest part of new regulatory measures involving FinTech is stemming.

Our paper closely examines the structure and effectiveness of the two most deployed tools that have surfaced so far, namely regulatory sandboxes and innovation hubs. The first are worthy of consideration as they allow an evaluation of services and business methods with reduced risk of regulatory exposure. However, policy makers need to be aware that transparency and business neutrality are key to avoid any backfire on legal certainty and efficiency. The last should be understood as privileged points of interaction between regulators and firms willing to overcome regulatory doubts. Their greatest asset is also their biggest weakness, as the case-by-case and cross-sectional nature of hubs is extremely time consuming for sector specific regulators that have to engage in complex and time-consuming preliminary work to provide effective answers. We argue that these innovation facilitators are corollaries of the classic principle of proportionality that has permeated administrative activity for decades. Most of the excitement surrounding them is due, indeed, to legal marketing considerations rather than to a truly original character.

Drawing on this systematisation of current regulatory strategies, we present “pro-competitive regulation” as a new, far-reaching paradigm that promises to unlock the competitive and innovative potential of FinTech. By drawing on the experience of the PSD2 in the EU, the Open Banking and Open Finance projects in the UK, and similar measures recently enacted in Australia, Canada and in South East Asia countries, we focused attention on the data access rule introduced in the financial sector to lower entry barriers for FinTech firms and tackle consumer inertia. While acknowledging the need to avoid any early excitement about their success as they are still under implementation, we praised them as regulatory measures, specifically tailored to curb FinTech market failures in a coherent and original way.

Rather than requiring regulators to engage in mammoth tasks (such as offering general counselling to market participants in the process of product design and implementation), the pro-competitive paradigm focuses on ex ante regulation in order to lay down regulatory mechanisms able to open up the market to new entrants. It will be up to them to make use of these tools to develop and test innovative services and business methods in the market. Against this backdrop, innovation facilitators are set to perform the marginal (yet useful) task of helping regulators to adjust current rules according to the principle of proportionality. Building on this systematisation, we present “pro-competitive regulation” as a new, far-reaching paradigm that promises to unlock the competitive and innovative potential of FinTech.

Note: This blog post was previously published in the Oxford Business Law Blog.

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