"Regulators have ‘upped their game’ in ways that would have been considered to be very ‘un-regulator-like'"

• Guner emphasised that fintech makes a very compelling case for cost cutting, operational efficiency, and increasing financial inclusion
• DFSA is developing a fintech team to supervise the activities of authorised fintech firms
• Guner also believes that innovation and how regulators manage it will continue to dominate the global regulatory agenda within the fintech space

The Global Backdrop

“May you live in interesting times!”

This is a quote attributed to the British politician, Joseph Chamberlain, during a period of great conflict and reform in the Victorian era.

I understand this expression comes from a Chinese saying that refers to chaotic times, and how it leads to great change.

From the events leading into the global financial crisis and regulatory actions that followed it, to the structural issues that we all had to deal with during the past 10 years, and accelerated by the current developments in fintech, we are indeed living in interesting – and challenging - times.

An overarching trend of the past several years has been an ever- increasing intensity of anti-globalisation and polarisation. The global trends of the past decade are shaping our present in an increasingly polarized fashion. We are now in an era of ideological and political extremes evidenced by events like Brexit, the US election results, and from my own country, Turkey, only this week.

This trend is a clear reaction to globalisation and will no doubt continue to dominate the political and economic agenda across the globe in the coming months and years.

In such tumultuous times, both politically and economically, trying to talk about the Future of Finance is really very difficult and the crystal ball is as murky as it can be at this point. Nonetheless, it is pretty clear that finance, as in almost all facets of our lives, is inextricably linked to developments in technology which are gaining an unstoppable momentum.

Self-driving cars, home deliveries and taxis by drones, the Hyperloop, and quantum computing, to name just a few technological advances that will have fundamental impacts on all our lives.

And as for fintech, why is fintech attracting so much attention lately? Financial technology has been around for some time now but its prominence and scope has never been so widely felt as it is now.

New fintech-based business models are succeeding in some cases with rapid market penetration. The adoption speed of these business models by the end-users with Generation-X habits has never been so high.

With significant developments in technology, fintech makes a very compelling case for cost cutting, operational efficiency and – most importantly - increasing financial inclusion. All of these drivers are the focus of attention for market incumbents as well as for new entrants.

It is interesting to me that the rise of fintech and disruption of established business models is happening despite of, and in parallel with, the polarization and anti-globalisation I referred to earlier.

So it is a state of dichotomy - on one hand there is a talk of putting up the walls of protectionism around national borders and on the other hand borderless transactions are increasingly facilitated through business models powered by fintech. It will be interesting to see how these two opposing forces interact and reach some form of dynamic balance in the coming years. However, I suspect that the ‘new norm’ will be constantly changing markets that drive innovation not only through fintech, but also the regulation of fintech.

What are we doing in the DFSA?

With these opposing forces in action globally, the DIFC (and the DFSA as its independent financial regulator) has been a venue for both stability and innovation and – increasingly – a long-established financial centre of choice for a variety of financial firms, including fintech companies.

The DIFC fintech HIVE Accelerator Initiative was launched earlier in 2017 and is attracting significant interest. Applications opened on 17 April. We in the DFSA have aligned our regulatory and supervisory framework to accommodate entrants to the HIVE. Our goal is to allow those offering financial services a seamless transition from the HIVE’s Accelerator programme into the DFSA’s Innovation Testing Licence (other regulators call it a ‘Sandbox’) and onwards from that towards the provision of full scope financial services authorisation.

To date we have already authorised two crowdfunding platforms and we continue to receive applications and interest from the market to authorise fintech based business models in the Dubai International Finance Centre.

The variety of applications and business models in the authorisation pipeline confirms that this trend will continue and the new business models will persistently challenge our existing financial and regulatory frameworks in an increasingly disruptive fashion.

As a response to these challenges we are developing a specialist fintech team to supervise the activities of the authorised fintech firms.

Our goal is to spur innovation with “right-touch” and tailored supervision to monitor some of the unique risk elements emerging from the fintech firms.

We have already deployed sophisticated business intelligence tools during the past 18 months to manage increasingly complex data sets generated by DFSA regulated firms, and we aim to develop this even further in order to manage fintech based business models.

Several initiatives that we have already implemented will be instrumental in this regard. We have gained significant experience managing large amounts of data generated by our regulated firms; this allows us to focus on regulatory risks in a more precise way. We use the business intelligence tools we have developed to monitor the activities of the regulated firms and spot outliers and regulatory infractions with the use of technology.

This is our own in-house regtech.

We are expanding our coverage of these tools to a wider-population of regulated firms and we are actively considering the use of more innovative solutions.

So in fact we already deployed - and will continue to deploy some of the most sophisticated regulatory technology to counter rising regulatory risks.

It is indeed interesting times.

As a regulator for the past 30 years, I cannot think of a time when the regulatory landscape has been so dynamic and forward-looking.

What is the future focus and where are we going from here?

Our fintech focus areas are derived from some of the unique challenges that fintech poses. These are based on the specific risks inherent in fintech based business models that we see.

Consequently, we must all recognise that there are challenges and responsibilities that all stakeholders (fintech entrants, regulators as well as consumers and other stakeholders) will have to address, and address actively several issues:

For the regulators:

• Innovation and how regulators manage it will continue to dominate the global regulatory agenda within the fintech space. We recently issued our Consultation Paper on “Innovation Testing License” and we are considering the comments received at this point.
• Disruptive business models fuelled by technology and programming/coding (and with fast adoption and penetration rates) may challenge our existing regulatory controls and we will need to refine or redesign them quickly to manage the risks they pose.
• Retail cross-border exposures are challenging regulatory boundaries and more co-operation and co-ordination among regulators globally is needed to address these risks. While there are bilateral and multilateral agreements in place among regulators, the existing operational arrangements and protocols to exchange information can be slow and may not match the speed of business conducted especially by these dirms.
• New skills in the regulatory toolkit of supervisors are vital to adequately deal with some of the elevated risks in fintech. This includes a far deeper understanding of technology, programming and algorithms, data security and cyber risks. Regulators will have to further develop these skills to assess the ‘new’ inherent risks in these fintech business models.

For the new fintech firms:

• Similarly, the fintech companies will have to develop their skills in Governance and Regulatory compliance. Fintech entrepreneurs are often unfamiliar with regulatory requirements and they often have a steep learning curve to ensure they comply with, for example, consumer protection requirements. My experience is that fintech entrepreneurs learn quickly and adapt to what is required of them with some speed.

For consumers and other stakeholders:

• And finally, consumers also will have to take some responsibility and understand the risks that they may be exposed to in this fast-paced, borderless financial system. For this reason comprehensive and focused consumer education is vital to achieve this (which the fintech firms themselves must take a role in helping their customers achieve).

In closing, it is indeed interesting times!

We will need to learn more, act faster and understand the unique nature of fintech in the global context that we operate in today.

Regulators across the world have ‘upped their game’ over the past two years in ways that until recently would have been considered by some to be very ‘un-regulator-like’.

The Great Financial Crisis, together with technological advances, have prompted – to my mind – the Great Financial Revolution. The DIFC and the DFSA are determined to be at the centre of that, and daily we are working on ideas to support innovation, part of which is fintech.