The benefit of such give-and-take is a safer global financial system that benefits all countries. Positioning regulation for technological innovation and cyber risks Let me move now to the second key priority of financial regulation going forward – positioning for the technological innovation sweeping the industry and the challenge of cyber security. FinTech or the application of technology to financial services is transforming as well as disrupting the industry. Digital payments are becoming more widespread, propelled by advances in near-field communications, identity authentication, and biometrics. Internet-enabled distribution platforms are emerging that make financial products directly available, e.g. peer-to-peer lending, crowd-funding, and pay-as-you-use insurance models. The smartphone is becoming your bank, your insurance broker, and your investment adviser. Blockchains or distributed ledger systems are being tested for a variety of financial operations – to settle interbank payments, to reconcile trade finance documentation, to execute performance contracts. Cloud technology is being used to store large volumes of data at low cost and retrieve them on-demand. Big data – aggregating and analysing large data sets, including through the use of sensor networks and natural language processing – is being used in many areas of finance: to gain richer insights into customer needs, to detect fraud in financial transactions, to sharpen surveillance of market trends. Regulating FinTech How should regulation deal with FinTech? First, we need to develop a deep understanding of these emerging technologies and the risks and opportunities they present. Financial regulators should not be afraid to work collaboratively with financial institutions or even FinTech companies.

To ensure that the consequences of any failure are contained, the experiments are conducted within agreed boundaries, such as the number of clients, scope of the activity, etc. The experiment is time-bound. If successful, the entity must exit the sandbox and fully comply with all relevant regulations if it wants to roll out the innovative product to the broader market. If the experiment fails, well, we all learn something. Regulatory sandboxes not only encourage FinTech innovation by providing a safe space for experimentation. They also give regulators an opportunity to learn the risks associated with new technologies and right-size regulation accordingly. In fact, the sandbox is an experiment not only for firms but for regulators as well. Harnessing technology to manage risk We must also look to harnessing FinTech to better regulate and supervise financial institutions and help them manage their risks. From a regulatory perspective, among the more promising applications of technology is in what is called “RegTech”, aimed at enhancing the efficiency and effectiveness of financial firms’ risk management and compliance. We can see RegTech advancing in several areas. Predictive analytics is being used in stress testing – to assess the ability of large, complex financial institutions to withstand a variety of stresses affecting different parts of the business in different geographies. Cognitive computing and behavioural algorithms are being used to monitor and detect suspicious trading and possible misconduct in financial institutions. Machine learning capabilities can help to identify subtle patterns in behaviour, which are hard to detect using traditional data analysis.