The head of the Chinese central bank’s monetary policy unit has warned of the problems that the rapid development of fintech is creating for local financial regulators, as well as called for a slew of compensating reforms.
In an article written for the Qinghua Financial Forum Sun Guofeng (孙国峰), head of the People’s Bank of China Monetary Policy Department, highlights a range of problems for local financial regulation in the fintech era.
Chief amongst them is the conflicting pursuit of both financial stability and financial development by local governments, oftentimes leading to regulatory omission in relation to fintech.
“Certain local governments seek to encourage financial innovation to pursue financial development, and the development of fintech and its widespread application in non-traditional financial operations makes this convenient,” writes Sun.
“However, China’s financial regulatory system for fintech purposes is still incomplete, and lacks an independent legal system or regulatory rules. This is especially the case when it comes to the application of fintech to non-traditional financial operations, leading to regulatory omission.”
Sun also points to the problems created by the fact that local regulators often deal with fintech platforms situated within their own jurisdictions that use the internet to operate on a nationwide basis.
“The growth of fintech has brought challenges for local regulation…following the growth of internet finance, very many offline operations have moved online, for the creation of P2P online lending, equity crowdfunding and other internet financial products.
“Non-physical operation and reliance upon internet sales channels has enabled institutions to remove their dependence upon physical outlets, and while some may be established within a given region, they may operate on a nationwide basis, making it difficult for local financial regulators to implement jurisdictional regulation.”
Finally, Sun points out that there is a contradiction between potential regulation and regulation of conduct that has weakened the protection of the rights and interests of consumers.
“The goal of prudential regulations is the protection of the health of financial institutions, while the goal of conduct regulation is the protection of financial consumers – there is a definite internal contradiction between the two,” he writes.
“Some financial institutions prefer risky clients, irrationally chasing high-returns, such as certain micro-lending companies that collect high interest rates, increasing their profits and strengthening their own capital.
“This conduct is prudential from the point of view of financial institutions, but it severely harms the interests of financial consumers.”
Underlying factors that contribute to these problems include:
- Insufficient clarity in the division between central and local conduct;
- Failure to fully employ central and local incentive and restraint mechanisms;
- Unequal allocation of regulatory resources.
In order to address these issues Sun calls for a range of reforms of China’s for local financial regulators, including:
- Improve coordination mechanisms for local financial regulators, including coordination between central and local regulatory systems, coordination between local financial regulators, and coordination between fintech regulators and traditional financial regulators;
- Clarify the division of labour and orientation for the professional duties of local financial regulatory institutions, especially as it pertains to the broad application of fintech to non-traditional financial operations, in order to prevent regulatory overlap and oversight;
- Firm up local financial regulatory duties, strengthen regulation and disposal of financial risk created by the usage of fintech, prevent the trend of the “localisation of profits, externalisation of risks;”
- Pragmatically protect the interests of financial consumers and investors by strengthening conduct regulation based on the unique features of fintech development;
- Strengthen base-level regulatory capability, raise local financial regulatory capability;
- Strengthen the application of regtech in local financial regulation, use big data, cloud computing, AI and other forms of regtech to identify hidden risks and adopt prompt measures.