BigTech and regulatory challenges in the financial sector

Speech to the European Parliament FinTech Working Group by Tobias Adrian, from the International Monetary Fund, exploring the regulatory challenges posed by BigTech. In his own words, “a wide-ranging and complex area for the future of effective financial regulation with enormous implications for financial stability”.

Tobias Adrian explains why should financial regulators be concerned with BigTech in a very illustrative manner using the example of the provision of cloud services:

- BigTech could be considered ‘too-critical-to-fail'. The financial sector relies heavily on the cloud services provided by BigTech:

• In UK more than 70% of banks and 80% of insurers rely on just two cloud providers.
• Globally, 52% of cloud services are provided by just two BigTech entities, while more than two-thirds of services are provided by four BigTech.

- Room for regulatory arbitrage. The speech echoes of some arbitrages and unintended consequences of current legal framework regarding Big Tech activity as they are not normally subject to comprehensive regulatory framework. For instance, it mentions the Open Banking regulation, that aims to facilitate competition, may have a “one-way flow of data that allows BigTech to capture a larger market share”. According to Tobias Adrian, this situation provides “BigTechs with a competitive advantage, not through innovation or better products, but through the benefit from a less comprehensive regulatory framework”.

- Regulating entities or regulating activities. According to the IMF, a mixed approach should be considered for BigTech: monitoring and risk identification should focus primarily on economic functions and activities but regulation and supervision should focus on entities. In the ideal world, if BigTechs are identified as systemic, it is more likely that home supervisors will need an entity-based approach and even there may be a bespoke regulatory framework for BigTechs.