FED Outlines Observations on Effective Fintech Risk Management
FED published the Consumer Compliance Supervision Bulletin for December 2019, which outlines the observations of FED regarding promoting effective fintech risk management. In the Bulletin, FED highlights that most banks can use their existing experience in compliance management to evaluate a new fintech collaboration or fintech activity. This resource is intended to enhance the understanding of common fact patterns and emerging risks to enable institutions to manage fintech risk appropriately and efficiently. This issue of the Bulletin contains an article that provides some general guideposts, to banks, for engaging in innovation while promoting effective risk management.
FED is committed to working with banks as they engage in responsible innovation to meet customer expectations, offer competitive products and services, and develop appropriate collaborations that fit the business model and risk appetite of a bank. FED highlights, in the Bulletin, that banks can consider several areas to manage the risks of a fintech collaboration. These areas include board and senior management oversight; effective policies, procedures, and training; risk monitoring; and third-party oversight. The Bulletin also contains a list of various FED resources related to fintech.
With respect to risk monitoring, strong institutions typically develop risk-monitoring and auditing processes that are sufficient to identify and address the potential risks of the fintech collaboration. The risk monitoring programs are monitored proactively to identify weaknesses and promptly make changes to minimize the risk of violations and consumer harm. Where the fintech business model relies on algorithms, machine learning, or artificial intelligence, strong institutions typically ensure that they understand the risks and controls for these models. With respect to third-party oversight, strong institutions typically understand that they will need to evaluate the activities of the fintech firm as though the bank itself performed the activities. Strong oversight controls include comprehensive contract provisions, appropriate compensation and incentive structures, and clear performance metrics.
Related Link: FED Bulletin
Keywords: Americas, US, Banking, Fintech, Consumer Compliance Supervision Bulletin, Artificial Intelligence, Machine Learning, Third-party Arrangements, FED
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