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March 30, 2016

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"For Fintechs, regulation is a sign of quality"

"For Fintechs, regulation is a sign of quality"

The digitalisation of the banking business presents new challenges not only for the sector, but also for regulators. Rupert Schaefer, Member of the Executive Board and Head of the Strategic Services division of FINMA, talks about key areas of focus, projects and principles relating to Fintech regulation.

It was in March of this year that UBS became the first bank to enable customers to complete the account opening process from their computers instead of having to go to the bank in person to do so. In order for banks in Switzerland to be able to offer this new alternative for account openings, one of the prerequisites was that the Swiss Financial Market Supervisory Authority FINMA amend its rules for the identification of clients. “Digital onboarding”, which is the possibility of opening account relationships in a purely digital manner, is only one of many areas where the rapid advancements in digitalisation in the banking business are becoming tangible. In an interview with insight, Rupert Schaefer, Member of the Executive Board and Head of the Strategic Services division of FINMA, discusses the other projects that FINMA is working on in this area, and how it approaches Fintech.

insight: How is FINMA adjusting to the advancement of digitalisation?

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Rupert Schaefer, FINMA Member of the Executive Board and Head of the Strategic Services division

 

Rupert Schaefer: New technologies in the area of finance (Fintech) is a topic that FINMA has been addressing for some time now, both at a strategic as well as technical level. FINMA has already introduced a number of concrete measures: it has facilitated the video and online identification of new customer relationships and reviewed its other regulations to see if they contained unnecessary obstacles for technological innovation. In addition, FINMA launched the idea of a licensing category for financial innovators as well as a license-exempt “sandbox”.

It is often said that Fintech companies that only provide a segment of the banks’ overall service offering should be regulated less strictly. Do you agree with that?

We agree with that. The current regulation does not foresee any specific licensing or supervision for Fintech companies. Regulation is typically drafted with traditional business models in mind, and can contain obstacles to market entry for providers of new ideas and innovations. This is what our idea builds on. Based on our experience, Fintech companies are not against regulation per se. On the contrary: it can serve as a sign of quality, and can be an advantage, for example, when looking to secure venture capital investments. That being said, Fintech companies want rules that are in proportion with the risks they carry. This is why FINMA suggested the creation of a new licensing category for financial innovators. Under this category, financial innovators are not treated as banks, because they continue to not be permitted to conduct the typical business activities of a bank: lending and higher deposit volumes.

How do you approach concerns about security, especially the concerns that customers could have?

It is of key importance that customers know who they are investing their assets with, or who is managing these assets. Is it a more intensively-supervised company with a banking license? A startup without any kind of license? And the technological changes in and of themselves offer not only significant opportunities, but also risks. In principle, regulation should be neutral vis-à-vis certain technologies. In other words: customers should enjoy the same level of protection for the same level of risk, irrespective of the technology. In addition, FINMA continues to follow the technological developments as well as international regulation very closely, and will discuss regulatory measures as required, and if specific risks arise.

A consultation on “digital onboarding” was concluded not long ago, and it recently became possible for customers to open an account in Switzerland on the basis of online identification. What kind of a response did FINMA receive to this development?

FINMA established parameters for customer identification by video and by means of online channels. The feedback on this was generally positive, because customer identification using newer technological tools is something that the sector wanted. FINMA formulated the corresponding rules in a manner that was as principles-based as possible, so that they will also be able to cover future technological developments.

What other kinds of projects will there be to ensure that digital banking continues to be appropriately regulated and fostered in future?

As I mentioned earlier, FINMA supports the creation of a new licensing category for financial innovators as well as a license-exempt space for development, a so-called sandbox. With these measures, obstacles to market entry, for example for the providers of payment systems, applications for digital asset management, but also crowd funding platforms and startup companies, can significantly be decreased. Further to this, FINMA will also undertake to make selective amendments to existing FINMA-regulation, with the aim of rendering it completely technology-neutral, and will continue to be in close contact with the sector. At the end of the day, however, the ball is in the court of the companies, because they are responsible for the innovations, and the free market will decide whether they succeed or not.

Has Switzerland fallen behind in comparison to other countries?

No, because various areas of Fintech are still at an early stage and a broad spectrum of developments are possible if opportunities are seized quickly. And: the other financial centres are not necessarily ahead. Some might just be better at marketing themselves. With, inter alia, our highly-educated specialists, internationally leading universities and an important international financial centre, Switzerland offers very good conditions. In addition to this, at the regulatory level, Switzerland has the possibility of quickly adjusting to new developments, independently from financial centres that come under the mandatory regulatory framework of the European Union.