Not the time for bend­ing the rules: su­per­vi­sion in the age of dig­i­tal trans­for­ma­tion

Erscheinung:27.06.2022 | Topic FintechsNot the time for bending the rules: supervision in the age of digital transformation

(BaFinJournal) By Mark Branson, BaFin's President

Digital innovation has continued to advance in the midst of the pandemic. This is, apart from the pandemic itself, good news: no market, no financial centre, can be future-proof without innovation. It would therefore be fundamentally wrong for supervision and regulation to stand in the way of innovation - even when innovation is having a disruptive impact.

BaFin is charged with safeguarding the integrity and stability of the financial market and protecting consumers. It is not BaFin's responsibility to shield old, established companies against competition from their younger counterparts, nor is it supposed to give newcomers a head start by softening supervisory standards and compliance rules. While a supervisory authority must be open to new technologies, it must also be neutral - true to the principle "same business, same risk, same rules". The question of whether a company will make it on the market should be decided by that market - and not by a supervisory authority that bends the rules for new enterprises.

It is imperative that supervisors not respond to digital innovation by weakening the standards in place. At the same time, supervision cannot simply remain what it has always been. A supervisory authority must develop a contemporary supervisory approach that enables it to competently oversee innovation while ensuring that the associated risks remain manageable. This is precisely what BaFin has set out to do in one of its ten medium-term objectives.

If we intend to competently oversee digital innovation, we also need to provide legal certainty for the companies that work with new technologies. Since time to market is a decisive factor for every fintech company and every new enterprise, BaFin aims to communicate with these companies as early on, as efficiently and as transparently as possible. Authorisation from BaFin is a seal of quality that builds trust; thus, from the companies' perspective, an authorisation procedure cannot move ahead quickly enough. All the same, authorisation and trust have to be earned. Any company planning to enter the regulated financial market must first prove to BaFin that it is in a position to do so - by demonstrating, for example, that its management is fit and proper, that it has sufficient start-up capital and that its business model is plausible.

In this respect, BaFin bears a great deal of responsibility as a supervisory authority. It cannot allow consumers to be used as guinea pigs to test risky innovations, which is also a reason why applications are subjected to thorough examination. Nevertheless, it is BaFin's express objective to continue improving its internal processes and reduce the processing time required for queries and applications.

The recent turbulence on the unregulated markets for crypto assets also has a great deal to do with trust. Some crypto assets involve tremendous risks, and BaFin has often warned consumers of these risks. It may feel hip and harmless to buy "crypto tulips" or to belong to a community of "Lunatics". But in the case of investments like these, it is also possible that billions of euros in savings will disintegrate within a short period of time - as we have recently seen.

Turbulence on the unregulated market undermines the market participants' confidence and entails painful financial losses. What is the best approach? Overregulation impedes innovation, yet where there is no supervision, there is potential for chaos. The solution? Supervisory approaches and regulatory conditions that are balanced and flexible - that set the stage for legitimate, well-designed innovation to flourish and provide added value for consumers.

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