From the U.S. Government Accountability Office, www.gao.gov

Transcript for: Additional FinTech Regulatory Oversight

Description: While emerging financial technologies have been making news
of late, we explore some FinTech risks for consumers.

Related GAO Work: GAO-18-254: Financial Technology: Additional Steps by
Regulators Could Better Protect Consumers and Aid Regulatory Oversight

Released: March 2018


[ Background Music ]

[ Lawrence Evans: ] We really need proactive, collaborative, regulatory
approaches.

[ Matt Oldham: ] Welcome to GAO's Watchdog Report, your source for news
and information from the U.S. Government Accountability office. I'm Matt
Oldham. Last year, we made a Big Bite edition of the podcast looking at
emerging products and services in the financial technology industry or
FinTech. And it's no secret FinTech services have exploded recently.
Whether it's mobile wallets, virtual coins, or robo-advising--these
services are digital, online, and fast. Recently, I sat down with
Lawrence Evans, a director on our Financial Markets and Community
Investment team, to talk about GAO's latest on FinTech. Lawrence, what
exactly are we talking about when we're saying FinTech?

[ Lawrence Evans: ] So, we are talking about technology infused into the
financial sector. And that's always been with us. But in this case, it's
new technologies, virtual currencies. It is marketplace lending where
people are securing loans online exclusively. And outfits are using
novel data and algorithms to price risks. So it's an interesting
combination of new technologies that is potentially transforming the
financial landscape.

[ Matt Oldham: ] Okay. So what has changed with FinTech is this sector
from last year's report?

[ Lawrence Evans: ] So you see, regulators are coming forward to offer
some additional clarity for people who are understanding the
technologies that are out there, their possibilities. You're seeing new
things like initial coin offerings, which people, I mean, when you think
about how people raise money on the stock market, you know, they issue
stock, IPOs. Now people are issuing virtual currency. And folks are
using that as a capital raising opportunity. So you're seeing a lot of
new innovation in the space. And it's fast moving. So if you ask me this
question in  two weeks, you'll get another answer.

[ Matt Oldham: ] Last year, we looked at some of the benefits. Are we
getting a better picture of what some of the risks are?

[ Lawrence Evans: ] Here's what we know. We know some of the risks are,
you know, the same risks that you see with traditional financial
products. There's a risk that you might secure a loan on higher terms
than you should have. You could get unsuitable advice from a
robo-adviser. You could find yourself experiencing an unauthorized
access to your account. But then there are also new risks, right. If you
lose your password in some virtual currency worlds, you lose access to
that money.

[ Matt Oldham: ] So in light of what you've just said, how confident
should consumers be in using some of these new technologies?

[ Lawrence Evans: ] That's an excellent question. You know, in some
cases, you have full coverage, right. So these firms aren't operating in
the Wild Wild West. You know, they're subject to oversight. You have the
same legal protections. But, you know, consumers should know the terms
and conditions associated with each product. They should know what data
is being collected and how that data is going to be used, where to turn
to if things go wrong. And so, that is important so that consumers don't
become overconfident in this space.

[ Matt Oldham: ] We're talking about technology that has a global reach.

[ Lawrence Evans: ] That's right.

[ Matt Oldham: ] Did this report look beyond our borders?

[ Lawrence Evans: ] You nailed it. That's right. So technology crosses
borders. We see innovative things going on in other countries. And so,
we wanted to look abroad to see how regulators were fostering innovation
and overseeing this industry. And so, we looked at the UK, Singapore,
Hong Kong, Canada, to some extent, and we saw some pretty innovative
approaches to regulating FinTech that we thought might be useful lessons
learned for US regulators. And what we learned when we looked overseas
is that they had really interesting approaches to help FinTech firms
learn about compliance. One is a regulatory sandbox, which is just like
your kids playing in the sandbox; it's a safe place to play. It
encourages responsible innovation and helps the FinTech firm learn about
the world in which they're operating, and also gives regulators a chance
to learn about the new products. And this is important for things like
blockchain, which is so new. I mean, it's almost reminiscent of what we
experienced in 1970s when we heard about the Internet protocol. We had
no idea where that would take us. Blockchain is like that, right. And
so, to be able to see that develop in an environment where you can
really learn about the specificities of the product I think is something
useful that we could take and apply here in some manner.

[ Matt Oldham: ] What do you think some of the challenges are that are
looming for FinTech?

[ Lawrence Evans: ] Well, the financial system is one of the more
heavily regulated sectors of the economy, for good reason, right. When
the financial sector sneezes, the rest of the economy gets a cold,
right. We want robust consumer financial protections, safety and
soundness, financial market integrity. So navigating this fragmented,
complex, regulatory structure is going to be the challenge going forward
for FinTech companies because they want to ensure that they're compliant
with the rules and regulations governing this space.

[ Background Music ]

[ Matt Oldham: ] So it sounds like regulators have some catching up to
do, as financial technologies continue to change and advance. I asked
Lawrence to walk me through his team's recommendations.

[ Lawrence Evans: ] Because of the fragmented nature of the regulatory
framework and the fact that, you know, FinTech cuts across so many
different jurisdictions, we are recommending robust, collaborative
efforts. That's ensuring the right agencies are at the table, you know,
for these collaborative efforts. And we want to ensure that they're
tackling some of the pressing issues. So we've made some recommendations
in that space. And also, we want them to glean lessons learned from
what's occurring overseas and tailor those approaches as appropriate for
the US context.

[ Matt Oldham: ] And what do you think people should take away from this
report?

[ Lawrence Evans: ] So technology is upon us, right. And so, to harness
it, to harness the benefits and the possibilities of FinTech, we really
need proactive, collaborative, regulatory approaches because that would
lead to right size regulations that secure the benefits, mitigate the
risks, and really leverage the opportunities that are presented at this
time. And this report does a good job of pulling all that together.

[ Background Music ]

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[ Background Music ]

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