Tech-driven innovation is poised to transform the investment industry over the next several years, and companies that can’t keep up will be left behind. But the real risk for investors, and the public in general, is if the watchdogs fall hopelessly out of step, too.
The Street, not always fairly, tends to have a dim view of securities regulators. They are seen as pedantic and far from industry-savvy. Yet, as technology increasingly drives the financial services business, that gap between regulators and the industry threatens to grow ever wider.
No longer is the regulators’ understanding of the law and some accounting theories good enough. If regulators hope to uphold the basic principles of fair and efficient markets, regulators now also need a deep understanding of the technology that underlies much of what the industry is doing and hopes to do in the future. Yet, the overlap between these skill sets – with the traditional disciplines of law and accounting on one side and technological knowledge on the other – is shrinking, as the technology itself becomes more sophisticated, complex and hard to comprehend.
The technological arms race among high-frequency traders and the evolution of market structure already have exposed the sorts of challenges that regulators are facing. Markets now function at speeds well beyond human comprehension, yet are governed by regimes built to supervise person-to-person communication and paper-based record-keeping.
Regulators are struggling to keep up. And this mismatch between the capabilities of the industry and the regulators threatens to grow wider as the industry embraces more fundamental innovations. Increasingly sophisticated forms of data mining and artificial intelligence may transform what the industry can do in communicating with clients and driving their behaviour. And computer science innovations, such as the development of distributed ledger technology, are threatening to replace much of the plumbing of today’s financial system.
The Ontario Securities Commission appears to be catching on with the launch of its new fintech hub. But regulators have much work to do if they hope to keep up with the investment industry.
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