Just as the rise of financial technology (fintech) firms are upending the traditional financial services sector, securities regulators are also grappling with new, emerging challenges, according to a new report from the International Organization of Securities Commissions (IOSCO) published on Wednesday that highlights the “increasingly important intersection” between fintech and securities regulation.

For example, the rise of fintech is pushing regulators to keep pace with technological innovation and “tap its potential for rendering the financial system more inclusive, efficient and resilient,” the IOSCO report says. To that end, regulators have launched dedicated fintech offices; opened regulatory sandboxes that allow firms to experiment with fintech solutions; and set up labs and accelerator programs.

In Canada, the Ontario Securities Commission (OSC) has led the way with its LaunchPad initiative, which combines features of a dedicated fintech office and a regulatory sandbox. Regulators in Quebec and British Columbia have also stepped their focus on fintechs.

At the same time, regulators are also assessing the emerging risks associated with fintech, the IOSCO report states, noting that certain risks are common throughout the sector, such as unlicensed cross-border activity, programming errors in the algorithms that underlie automation, cybersecurity breaches and the failure of investors to understand novel products and services.

Another risk, the IOSCO report says, is the failure of these online financial services firms to “know-your-client” (KYC). By transacting online, clients have increased opportunity to mask their true identity, and firms that use automated profiling processes run the risk of failing to properly assess and ensure suitability.

The mismatch between regulators and fintechs in geographical terms is also a challenge, the IOSCO report says: “While tech firms operate globally, regulation is conducted largely within national or subnational borders. The local nature of regulation may create challenges regarding cross-border supervision and enforcement, whereas regulatory inconsistency across jurisdictions increases the potential for regulatory arbitrage.”

Regulators should try to deal with these challenges through international co-operation and the exchange of information, the IOSCO report states.