Opinion | Financial regulatory supervision in fourth Industrial Revolution era

The Fourth Industrial Revolution has brought a fundamental change in the way we live, work and relate to one another; more importantly the way we relate to physical living, way of life, digital & technological changes. It is also making us redesign the way we planned for growth of businesses and economies.

New technologies as anything new, can be agents of change, for the betterment. Access to information and literacy around products and services can improve the lives of billions of people. With increasingly powerful yet cheaper-cost computing devices and networks, digital services, and mobile devices, this can become a reality for people around the world, including those in underdeveloped countries. This also brings the automation of traditional manufacturing and industrial practices, using modern smart technology. Machine-to-machine communication (M2M), Internet of Things (IoT), Machine Learning (ML), Artificial Intelligence (AI) are in commercial use for increased automation, improved communication and self-monitoring, and helping in analysing and diagnosing issues, without the need for human intervention.

4th IR & Financial Services

The financial services sector in India has started adopting the power of the 4th IR. Businesses across banking, insurance, asset management, pensions, wealth management, mortgage, forex, debt markets, capital markets are using the digital tools to process reengineer themselves and to add to the pace and quality of consumer services delivery.

As we already see in the Indian consumption space, the usage of mobile devices for delivering services has become common place. We have the trinity of Jan Dhan, Aadhaar, Mobile. Technology-powered sachet-loans to stock decisions based on computer algorithm to crypto-regimes to banking powered by blockchain technology are already transforming the financial sector.

Some of the benefits that 4th IR could have on the financial sector include :

24 x 7 access for consumers

Slashed costs of delivery of financial products & services (thereby reducing cost of products and also decrease in the operational cost of FS brands)

Transparency of process from pre-sales to post-sales

Audit trail for every process with time & geo-tagging

Faster financial transactions

Data-driven decisioning and avoids human bias

Removal of undue intermediaries

Transparency of data in real-time

Ability to pre-screen data constantly to proactively avoiding frauds

Easier accountability and ability to assign responsibility

Regulations & supervisory roles

Regulation changes can be broadly classified as ‘organic’ change and ‘crisis-driven’ change. World-over, the latter pushes for larger set of regulatory changes, sometimes at greater cost to the economy and to reset consumer trust in the system.

Regulations have time and again proven inadequate globally. With the interconnectedness of our financial markets and systems becoming denser, and the global markets being interconnected, we cannot afford ostrich-head-in-the-sand approach that few markets practiced. Our regulatory & supervisory institutions cannot have any excuse for any lapses or afford to be late to the game.

Impact of 4th IR on Regulations

With policymaking moving at a painfully slow speed compared with the exponential growth of 4th Industrial revolution space, especially in digital & technology, policy makers, lawmakers and regulators have a large challenge ahead of them. Despite all the efforts to close the gap, policymaking could still be far out from the digital capability and potential use as well as misuse of it.

Global tech giants are already into financial services sector, influencing of policy discourse through their communication platforms & products. On the positive side, constructive tension will increase with those who want to disrupt conventional finance (including banking) industry models. This would need a regulatory system that can understand these and not just simply ban them. It would be useful for our financial services regulators to have a proactive and dynamic Tech-digital charter; and to avoid the syndrome of creating a hierarchy of banking-brahmins of sorts.

In the digital finance world, speed of consumer adoption would allow these finance entities to go from “too small to bother about” to “too big to fail” in a very short period of time. Regulations have to accept digitisation in finance (including digital currencies that might evolve), while preserving financial stability and ensuring adequate consumer protection.

In the digital era we live in, it’s social media that rules the world. It’s opinions influence the narrative and “news becomes fact” and not the other way “fact being news” ! To avoid any undue public impact or market reactions, regulators have to improve their reaction time in dealing with any industry issues.

“Super Vision” vs Supervision

The regulatory role is to develop any legislation to address the objectives of rule-making for the sector, including promoting innovation in the industry to address consumer needs. The supervisory role is to ensure compliance with rules & regulations and to taking punitive action against any breaches. A well-run supervision should contribute to the wider financial & sectoral stability. As more issues keep cropping about the irregularities in the sector or consumer-trust issues, the need for stronger vigilance and proactive supervision is needed. Supervisory cadre needs long-term-focussed regular skill enhancement, competency building and adopting digital tools when they appear and not later than the industry it supervises!

History has taught us that people will constantly innovate, including ways to “game the system”. To clamp down on these elements, it would need ability to work with ethical-digital-activists (some call them hackers). Our institutions are hierarchy-led than knowledge-led and hence miss the boat when it comes to younger experts who have the capability in areas of newer innovations. These institutions will need to hire more digital & data experts to help them in their supervisory process. Supervisors are not super human beings. They need to use technology to help them track down regulatory-predators proactively and preferably before or during the attempt to break the regulations.

In today’s gig-economy and knowledge-workforce world, we need to rethink our outdated views on lateral hires in regulatory institutions. Globally, it has been observed that cross-pollination of talent between regulatory bodies & industry entities, has added value to all the stakeholders. Some of our financial regulators have started taking baby-steps in this process; hopefully it would be whole-heartedly soon.

To help our institutions with talent and leadership, we cannot have delays in appointments to the various regulatory positions. Especially when the vacancy due-date is known much in advance; in a nation of over 1.2 billion people, are we that woefully short of talent?

(The author is an independent markets commentator. Views expressed are his own and do not reflect Mint's.)