Primer on Designing Optimal Regulation

Abstract

Technology is changing users’ experience of finance. The latest wave of financial technology goes beyond innovations in the delivery of financial services. It is expanding the choice set of financial services available to users and the ways in which they choose and consume from it.

Several mechanisms enabled by technology are mediating these changes including the (i) disintermediation of traditional financial services; and (ii) the convergence of processes, platforms and financial infrastructure, bringing together services and products that were previously offered independently. Simultaneously, the increased availability and use of personal information in offering providers the opportunity to personalise financial products and services suitable for each consumer.

As consumers begin transacting in this new environment, new considerations arise for the financial system and the existing regulatory rubric. The need arises to re-visit the regulatory posture assumed in a more analogue, less data-driven financial landscape on issues of micro-prudential risk, conduct regulation, consumer protection and systemic risk.

Foundational questions that arise include where the regulatory perimeter should lie with respect to new non-financial sector entities in the chain of financial services provision, and how the tension between institution-based regulation and function-based regulation might be resolved in India. The robustness of existing frameworks for risk assessment, consumer protection, apportioning liability and the use of client data need to be reassessed in this new landscape. Designing the optimal regulation for data-driven finance will require the creation of a new, shared understanding of risks that emerge in this changing financial landscape, calibrating appropriate regulatory responses and new methods of coordination across regulators within and outside the financial sector.

Keywords: Conference, Dvara Research, Dvara Research Conference, Future of Finance, Regulating Data-driven Finance

JEL Classification: G