Small scale limits need for fintech controls


By Sarah Kendell

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Australia’s emerging digital financial services industry will only need comprehensive regulation when it becomes systemically important, which is not likely to happen in the near future, according to a leading financial law academic.

Speaking at yesterday’s Centre for International Finance and Regulation conference on regulating digital financial services, Professor Ross Buckley of the University of New South Wales said digital finance operated under a different risk model to traditional forms of banking, so regulators should approach it differently.

“The scale of risk for digital financial services versus banking is very different,” Buckley said.

“Digital payment systems seek to avoid risk because it lessens their profit, whereas traditional banks actually seek out risk because that is ultimately how they make their money.”

For regulators looking at emerging digital financial services businesses, Buckley pointed out two key areas of consideration – consumer protection and the protection of the value of money invested in the company.

“There has to be a free way for consumers to seek recourse if something goes wrong,” he said.

“Without an effective recourse mechanism, whatever rules a regulator puts in place essentially don’t matter.”

It was also important for regulators to keep a watching brief on emerging companies, particularly those where volumes were rapidly increasing.

“Digital finance has an extraordinary ability to grow, due to the network effect of online commerce,” Buckley said.

“It’s important for companies to put the regulator in an information loop, so it can monitor the extent to which they are becoming systemically important.”

Once companies reached the stage they were likely to have an effect on the financial system, there would be scope to step in with more comprehensive regulations, but until then regulation would do more harm than good, Buckley said.

“Digital financial services are not likely to reach this systemically significant stage in most markets any time soon,” he said.

“Given this, I would urge regulators to keep in mind that there’s no point having a world-class suite of regulatory measures and no innovative ecosystem to regulate – that is a hollow victory.”

Buckley pointed out that with the local fintech industry at a key developmental stage, regulators should err on the side of supporting emerging companies to prosper rather than hampering their operations with excess red tape.

“The benefits of a vibrant financial ecosystem are much greater than the risk of the small losses that might occur,” he said.

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