The Financial Stability Institute (FSI) of BIS published brief paper examining the regulatory approaches and policy options for oversight of large technology companies, also known as bigtech firms, operating in the financial sector. The paper examines the regulatory landscape for such bigtech firms, discusses the avenues for improvement, explains why bigtech firms are unlike other entities and deserve regulatory attention, outlines their regulatory treatment and financial licensing in a number of jurisdictions, and offers considerations for policymakers. The paper concludes that the entry of bigtech firms into finance calls for a comprehensive public policy approach, which combines financial regulation, competition policy, and data privacy.
At present, financial services represent a relatively small part of the overall activities of bigtech firms, though this can change rapidly due to the unique features of their business models and they could quickly become systemically important or too-big-to-fail. The financial operations of bigtech firms are subject to the same requirements as those of other market participants, as part of which the bigtech firms need to hold appropriate licenses to perform regulated financial activities or provide their services in partnership with financial institutions that meet the regulatory requirements. Risks connected with bigtech activities in finance may not be fully captured by the present regulatory approach, which is geared toward individual entities or specific activities and not the risks that are created by substantive interlinkages within bigtech groups and their role as critical service providers for financial institutions. The entry of big techs into finance calls for a comprehensive public policy approach that combines financial regulation, competition policy, and data privacy. The paper presents the following policy options that may support authorities in their considerations of the best way to adjust the regulatory framework to address the risks that the business models of bigtech firms entail:
- Recalibrating mix of entity-based and activity-based rules. Some advocate that any policy adjustments for bigtech firms should move from an entity-based regulatory approach to one that is activity-based, applying the principle of “same activity, same regulation.” However, activity-based regulation can only complement, rather than substitute for, entity-based regulation. For bigtech firms, their business model involves a bundle of varying activities (such as e-commerce, payments, and cloud services), each of which gives rise to a specific set of potentially interrelated risks. Thus, the paper notes that characteristics of bigtech firms should be considered in how they are regulated and makes a case for developing more entity-based rules for bigtech firms in specific regulatory areas such as competition and operational resilience.
- Developing bespoke policy approach for bigtech firms. Policymakers may conclude that the unique features of bigtech firms warrant a comprehensive public policy approach that focuses not only on individual bigtech entities and their activities but also on their interactions within the bigtech (digital) ecosystem. They can build on existing policy frameworks such as the ones for financial conglomerates and global stablecoin arrangements as well as on approaches being developed by authorities worldwide. A key element of this policy framework would be to monitor and mitigate the systemic risk stemming from a combination of the wide range of activities of bigtech firms. A foundational element of any such approach would be to establish a set of objective criteria for qualifying a firm as bigtech, which could be difficult given the heterogeneity of bigtech firms.
- Enhancing local and international supervisory cooperation. In the light of the cross-sectoral and cross-border nature of bigtech activities, it is imperative to emphasize on cooperation and coordination at the local and international levels. A practical step in this direction could be to establish cross-sectoral and cross-border cooperative arrangements between national authorities, including at least financial, competition, and data protection authorities. Such cooperation arrangements could involve or augment the existing arrangements and build on the experience of running supervisory colleges for banks.
Keywords: International, Banking, Insurance, Securities, Fintech, Cloud Service Providers, Bigtech, Regulatory Approach, Policy Options, Licensing, BIS, FSI
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