Global standards can help FinTech companies, financial institutions and regulators work from the same, open book. But perhaps the overarching questions for a global industry such as FinTech are: Who sets the standards and how?
Now seems to be the time for vital standards discussions on financial services technology. But perhaps the overarching questions for a global industry such as FinTech are: Who sets the standards and how?
Of late, bodies such as the EC have begun asking such questions, for example, in its Q2 FinTech consultation. Our view is that we should encourage the use of the existing, global standards process which has served the industry for decades – and can help FinTech companies, financial institutions and regulators work from the same, open book.
The EC consultation, “FinTech: A More Competitive and Innovative European Financial Sector,” ran from 23 March to 15 June 2017. Its aim was to “… [seek] input from stakeholders to further develop the Commission’s policy approach towards technological innovation in financial services.” It covered a variety of topics, such as artificial intelligence and big data analytics, recording, storing and securing data, and distributed ledger technology (DLT). But most interesting to us was the section of questions on standards.
There were several key questions relating to standards in FinTech, such as: “Is the development of technical standards and interoperability for FinTech in the EU sufficiently addressed as part of the European System of Financial Supervision? Is the current level of data standardization and interoperability an obstacle to taking full advantage of outsourcing opportunities?”
In general, these questions give us a chance to consider the role of the regulator in developing standards, and how they should approach FinTech. Some could argue that the EC and ESFS should be focused on outcomes in their supervision of FinTech, and remain technology agnostic. This hands-off approach would void regulatory requirements specifically targeted at FinTech institutions. Proponents of this view note the opportunity for innovation to flourish in a pro-competition environment, whilst ensuring safety and compliance.
[Related: “The Next-Generation FinTech Economy”]
However, as we have often noted on these pages, standards are key for managing systemic risk, as is encouraging opportunities for nascent FinTech. The focus on the usefulness of standards in these spheres and the need for them is highlighted and framed as a focus for the EC and other standards setting bodies. FinTech is global and, therefore, not suitable for jurisdictional standards in general. Such standards should only be used as a last resort after options for using global standards have proved fruitless.
We would encourage the EC to promote and mandate the adoption of global standards for a couple of reasons: (1.) FinTech is global and (2.) existing models, such as the ISO (International Organization for Standardization) model, could fit well for achieving the consultation’s goal. On the first point, there are so many products that are cross-jurisdiction by nature, like data processing and settlement reconciliation, that the only sensible option is to move toward global standards. On the second, the models such as ISO’s meet the description of competition-friendly standards: “participation in standard-setting must be unrestricted”; “procedures for adoption of standards must be transparent”; “access to standards must be granted on fair, reasonable and non-discriminatory terms.”
In response to the second part of the question on data standardization, the answer seems to be having a process for developing and maintaining standards that is both agile and adaptable. This allows scope to address issues with data standardization and interoperability as they arise.
Other interesting questions raised on standards were: “In which areas could EU or global level standards facilitate the efficiency and interoperability of FinTech solutions? What would be the most effective and competition-friendly approach to develop these standards?” Working toward international standards is a positive goal in the industry as they are, by their nature, competition friendly; but they do require systems in place to enable a level playing field, and an open and inclusive process for developing a new standard.