The Financial Stability Institute, or FSI, of BIS published a paper by the FSI Chair Fernando Restoy that explores how regulation should evolve to meet public policy goals and encourage fair competition between traditional banks and new fintech and bigtech entrants. However, public policy goals such as financial stability, market integrity, and consumer protection rank first in the order of priorities, when compared to ensuring a level playing field. The paper examines the implications of the move from an entity-based to an activity-based regulatory approach under the principle same activity, same regulation. It advocates that regulatory framework should incorporate entity-based requirements for bigtech in areas such as competition and operational resilience to 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.
The paper highlights that, in some policy domains, such as consumer protection or anti-money laundering, an activity-based approach may 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. The existing regulatory framework in major jurisdictions does tend to impose comparable rules in certain areas but 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.
However, 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 tech firms 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 tech firms 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.
The paper argues that there is only limited scope for further harmonizing the formal requirements to be satisfied by different players in specific market segments without jeopardizing higher-priority policy goals. Contrary to what industry and other observers often claim, there seems to be a strong case for relying more, and not less, on entity-based rules. The current framework could be complemented with specific requirements for big tech firms that would address risks stemming from the different activities they perform. The concrete definition and the enforcement of those new rules would entail close cooperation across financial, competition, and data protection authorities worldwide.
Keywords: International, Banking, Fintech, Bigtech, Entity Based Approach, Activity Based Approach, Financial Stability, Systemic Risk, BIS
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
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