A Rational Regulatory Strategy for Governing Financial Innovation

Abstract

Modern financial regulation has predominantly been economically-driven, ¹ progressing from addressing market failures to making markets more competitive and work better. ² The UK Financial Conduct Authority is expressly mandated to pursue regulatory objectives that maintain market integrity and protect consumers (addressing market failures) and to promote competition (making markets work better). ³ Both the FCA and its sister regulator, the Prudential Regulation Authority (for banks), have recently adopted innovative regulatory initiatives to promote technologically-driven innovation, aimed at making markets work better. These initiatives are also a response to the recent explosion of technologically-led financial innovation outside of the regulatory perimeter.

In promoting financial innovation, we argue that the regulators have insufficiently focused on the need to govern financial innovation more generally. Although this concern may seem premature, the regulatory innovations are increasingly extending the perimeter for regulatory oversight of financial innovations. As the regulatory innovations have the potential to develop into more mature regulatory frameworks for governing financial innovation, we argue that regulators should manage the risks of their current approach and develop a regulatory strategy framework for balancing regulatory objectives and developing regulatory policy. We propose a framework anchored in rationality, consistency and accountability in governing financial innovation.