Flexible Regulation Would Support Financial Innovation, New Report Shows

November 4, 2019

WASHINGTON—To encourage greater technology-driven innovation in financial services, a new report from the Information Technology and Innovation Foundation (ITIF), the world’s top-ranked think tank for science and technology policy, recommends that regulators adopt more flexible models of oversight and accountability. The report outlines the administrative processes and regulatory approaches that countries should pursue to balance regulatory oversight with financial innovation.

“Financial services are poised to change rapidly in response to new technologies, by increasing financial inclusion, improving the quality of services, and boosting productivity—but only if regulators strike the right balance between regulation and innovation,” said ITIF Vice President Daniel Castro. “Given the financial-services sector is already highly regulated, a hands-off approach is not enough. To maximize the benefits of emerging technology in financial services, while avoiding potential harms, policymakers will need to actively support fintech innovation in a way that ensures a level playing field between new entrants and incumbents.”

As the report explains, administrative processes and regulatory approaches that promote flexible oversight include:

  • Stakeholder engagement and support;
  • Coordinating regulatory efforts at the subnational, national, and international levels;
  • Facilitating experimentation, such as through no-action letters and regulatory sandboxes;
  • Alternative supervision, such as bank charters, third-party supervision, and self-regulation; and
  • “Regtech,” such as compliance technology and supervisory technology, that helps regulators monitor, report, and enforce compliance.

“While U.S. regulators have taken steps to promote financial innovation, the United States still lags other leading countries, primarily due to a lack of harmonized rules across federal and state regulations,” said Castro. “Active policy support and flexible oversight would help bolster U.S. competitiveness in financial services.”

Read the report.