The future is now for financial innovations, but the excitement cannot overshadow investor protections. That was the message at the Securities and Exchange Commission’s inaugural forum on FinTech, a daylong event held on Nov. 14.
The rapid development of new platforms and technologies for financial services, which has been accompanied by tremendous growth in private investment and growing attention from regulators, “makes this an ideal time to bring the relevant stakeholders together to discuss both the role of FinTech in our securities markets today, and where it is headed,” SEC Chair Mary Jo White said at the open of the day’s events. “With global investment in FinTech companies estimated to be over $19 billion last year, it is safe to say that [it] is well on its way to playing an important role in the future of the securities industry.”
Entrepreneurs should recognize that they are not only innovators, “but also market participants with important duties and obligations,” she added. “It is important to foster an environment where potentially transformative innovations that make for safer, better markets can flourish. But, as the saying goes, with power comes responsibility. We must ensure new developments are not rushed to market or implemented in a way that facilitates a risk of fraud or harm to investors.”
Among the topics under discussion was “robo-advisers,” software that can automate investment choices on behalf of clients.
“The last few years have seen rapid growth in the availability and popularity of automated investment advisory programs,” White said. “Consistent with our mission, we have been considering how these so-called robo-advisers, as registered investment advisers, meet their fiduciary and other obligations under the Advisers Act.”
Specifically, the SEC is looking at how advisers that provide investment advice with limited, if any, human interaction: provide appropriate disclosures so that their clients understand their services; and obtain information to support their duty to provide suitable advice.
“We also are considering how automated-advisers are designing their compliance programs to address the particular challenges relevant to providing automated advice and how these firms safeguard client data and address business continuity in the event of a disruption,” White said.
Another important trend is distributed ledger technology, also known as blockchain, that “could greatly simplify the trading, settlement and clearing processes, making transactions faster, more efficient, and less expensive,” White said.
The SEC will look closely at how innovators will overcome challenges to the widespread adoption of distributed ledger technology, such as interoperability and scalability, and to what extent such systems will be permissioned, she explained. Another important concern is how firms in the space will address issues of cyber-security and the safety of customer data and assets in a blockchain.”
Also evolving in the new technology arena are online marketplace lenders and crowdfunding portals. In the online marketplace lending space, Commission staff will focus on investor protection.
A key challenge is the adequacy of the information available to investors to make informed investment decisions, such as information about the loans and borrowers underlying their investments, as well as the platform’s proprietary risk and lending models, White explained.
“As investors are drawn to potentially higher yielding but riskier marketplace loans, information about the borrower’s ability to repay the loan underlying the investment is critical,” she said. “When it comes to these investors, innovation must be built upon a foundation of full and fair disclosure of material information, which is the bedrock of the federal securities laws.
Commissioner Michael S. Piwowar echoed White’s desire to balance innovation with investor protections. “The great potential of FinTech should not be hindered by our current regulatory structure,” he said. “The Commission should take the lead regulatory role in the FinTech space.”
Many of the firms pursuing FinTech are already SEC registrants, and others are providing services that are squarely within the Commission’s oversight, such as investment advice and trading and settlement functionalities, he explained, adding that it is “the only agency with a mission that explicitly includes facilitating capital formation...The SEC is uniquely situated to determine whether and how FinTech currently fits, and ultimately should fit, within a financial regulatory structure.”