Pew Report: Financial Innovation Calls for Balanced Regulation

WASHINGTON—U.S. regulators are considering how best to respond to emerging financial products and services. Examples set forth by international regulators suggest that American authorities need a more coordinated approach to encouraging innovation, one that reduces regulatory ambiguity and protects consumers, according to a report from The Pew Charitable Trusts.

The report, “How Can Regulators Promote Financial Innovation While Also Protecting Consumers?” notes that although many U.S. and international policies are similar, they diverge over the promotion of consumer-friendly innovation. The international community has created national programs to encourage development of desirable products while also protecting consumers, but the U.S. efforts to remove barriers to innovation have been fragmented, exposing industry to uncertainty and consumers to potential harm.

“Innovation is exciting because it can expand marketplace options, but it also creates risk, especially when there is uncertainty about how consumer protections or other rules apply,” said Nick Bourke, director of Pew’s consumer finance project. “Regulators should work together to ensure that innovation improves transparency and competition in the marketplace while meeting the needs of consumers.”

Pew examined the regulatory approaches of several governments that have a strategic economic interest in financial technology: Australia, the European Union, Malaysia, Singapore, South Korea, Thailand, Abu Dhabi, the United Kingdom, and the United States.
International and U.S. regulators approach emerging business practices, products, and services in three distinct, but complementary ways:

• Creating outreach programs to bring together regulators and market participants to clarify how innovation fits into the existing regulatory framework.
• Changing the regulatory framework to encompass new products, practices, and providers.
• Suspending regulatory barriers to encourage innovation.

Although regulators worldwide have generally adopted common strategies for outreach and regulatory modification, U.S. policies to promote innovation have diverged from international practices. International authorities have identified coordinated national strategies to encourage development of specific, desirable types of products and services by reducing burdens while also prioritizing near- and long-term consumer protections. In contrast, U.S. efforts to promote innovation are fragmented, characterized by a patchwork of state and federal initiatives that lack a common organizing strategy, exposing markets to regulatory uncertainty and consumers to potentially harmful products and services without adequate protections.

“U.S. regulators can build upon international successes that show that regulators can encourage innovation in a coordinated, deliberate manner that promotes a safe and efficient marketplace,” Bourke said.