Level playing field needed for banks and fintechs

The Bank of International settlements is calling for a level playing field between banks and fintechs.

BIS warned of the risk of fintechs growing too large and sprawling for financial markets.

The Swiss-based Bank of International Settlements has called for a levelling of the regulatory playing field between fintechs and banks if competition is to be preserved in the financial system.

In its latest paper the Bank of International Settlements called for central banks to regulate to ensure a level playing field for banks and fintechs and to avoid inadvertently skewing the market through differing capital and technical burdens.

Widely seen as the central bank for the world’s central banks, the BIS found current financial regulatory frameworks subjected banks to stricter regulations than those given to fintechs.

The reports author and chairman of the Financial Stability Institute Fernando Restoy said new regulator categories for fintechs sometimes sought to promote competition and financial inclusion by imposing lighter capital and risk requirements.

Mr Restoy said regulators should not require a bank license for all firms allowed to compete in the same markets as banks,

“Unless it is proven otherwise, that extension of entity-based requirements to all players would not be necessary to achieve primary policy objectives, such as financial stability,” he said.

“It does, however, damage the level playing field, as it would simply protect a subset of firms from their competitors.”

Mr Restoy said insteaed, the current regulatory framework could be improved with specific regulatory frameworks for big techs to address “risks stemming from the different activities they perform”.

The BIS warned if regulatory regimes were not tightened up fintechs risked being given a competitive edge over banks, which are required to hold far greater capital reserves.

However, Mr Restoy said achieving a level playing field was only desirable “if higher-priority policy objectives are ensured”.

“Fostering a level playing field is not the primary objective of financial regulation. Public policy goals such as financial stability, market integrity and consumer protection rank first in the order of priorities,” the Spanish economist said.

“Moreover, equating the conditions to be satisfied by different types of player in particular market segments would not always promote more competitive markets.”

The report’s author noted existing regulatory framework in major jurisdictions tended to impose comparable anti-money laundering and counter terrorism financing laws, but supervision and enforcement of those laws differed greatly depending on the type of financial entity.

Mr Restoy called for a functional organisation of financial supervision, away from the current sectoral model, to eliminate discrepancies.

“Heightened vigilance of new, non-bank players’ activity seems essential in order to address current challenges in ensuring market integrity, as well as to mitigate distortions created by differences in the effective regulatory burden experienced by different types of entity,” he said.

But Mr Restoy said new regulation may create “unwarranted competitive distortions” through either introducing specific activity-based obligations., or imposing specific obligations on some but not all entities in financial markets.

However, the BIS warned of the risk of fintechs growing too large and sprawling for financial markets.

“Some big techs continue to increase their presence in the financial services market, their operations may acquire systemic importance,” the report said.

The BIS noted the potential of big techs and financial players “to achieve a dominant position” which they may use to adopt anti-competitive practices.

However, they noted the introduction of the Australian open banking data right scheme was a strong step in the right direction for addressing potential information capture by major financial players.