The challenges of regulating technological innovation in the financial services sector
The financial services sector, in its constant quest for development, speed, efficiency and optimisation, is a fertile ground for the emergence and development of new innovative solutions, such as those based on artificial intelligence (AI) and machine learning, which already have many applications in the markets with a rapid and growing development. Indeed, financial institutions are encouraged to adopt AI and new technologies because of the numerous benefits they can derive from them: cost reduction, process automation, risk management optimisation, productivity improvement and increased profitability. On the other hand, innovative firms, fintechs, are developing new technologies to optimise and rethink the provision of financial services.
regarding investment services (algorithmic and high frequency trading, robo-advisors), banking services (neobanks, credit scoring) or financial crime (AML (KYC, transaction monitoring), fraud detection). Beyond the emergence of new business models, financial technological innovation also offers other opportunities for regulated institutions in terms of compliance with regulatory and prudential requirements (regtech) but also for financial authorities for regulatory, supervisory and control purposes (suptech). The rise of regtech and suptech has been driven by the significant increase in the availability and granularity of data, as well as by the development of new technologies such as AI and infrastructures such as cloud computing and application programming interfaces (APIs) which together make it possible to collect, store, and analyse large data sets more quickly and efficiently.
The application of new technologies in the financial sector, however, affects the risks inherent in the financial system and itself introduces new risks, for example in relation to data protection, consumer and investor protection in cyberspace and market integrity, or in terms of cyber risks. From a legal perspective, the emergence of disruptive technologies in the financial services sector poses a challenge to traditional regulatory methods. The fintech ecosystem, which brings new players alongside regulated financial institutions, is changing the dynamics of the financial system. This emergence, combined with the emergence of new disruptive financial services, has challenged the application of existing financial regulations to new fintech activities. This explains why, in recent years, the
Many applications of AI are already a reality in financial markets, notably
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