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New activity, new risk, new rules

Applying time-worn policy frameworks to new financial technologies can lead to unexpected risks — including both under-regulation and over-regulation. By embracing practices grounded in “futurism,” authorities can better recognize when innovations call for breaking the regulatory mold.

When financial regulators are faced with new innovations, they have a ready response: “same activity, same risks, same rules.” This principle has been invoked by leading international policymaking bodies, such as the Financial Stability Board. Faith is placed in the techno-agnostic, timeless nature of financial regulation so that innovations do not evade the regulatory catchment.

This faith is often misplaced, however, and runs contrary to the futurism that financial regulators should embrace. There is false allure in the “same activity, same risks, same rules” mantra. In truth, much of financial regulation hangs on specific market failures and is not as timeless as we might hope. It responds to a range of problems: scandals exposing a particular regulatory gap, private or public losses that reveal room for regulatory improvement, an obsolescence that needs overhauling or regulations that appear out of sync with their regulated subjects and practices. Financial regulation will therefore develop incrementally to address precise market failures. Often, this also means that regulation is specific to certain business models, industry practices and existing technologies.

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Author

  • Iris H-Y Chiu is Professor of Corporate Law and Financial Regulation at the Faculty of Laws, University College London. She is Director of the UCL Center of Ethics and Law and advances the public and stakeholder engagement of the Center’s agenda in relation to a wide range of issues in relation to law, regulation, governance and ethics in business and finance. She has published extensively in the areas of corporate governance and financial regulation, including “The Foundations and Anatomy of Shareholder Activism”(2010), “Investment Management and Corporate Governance” (2017), “The Legal Framework for Internal Control in Banks and Financial Institutions” (2015),“Banking Law and Regulation” (2019) and “Regulating the Crypto-economy” (2023). She is a Research Memberof the European Corporate Governance Institute and a Senior Scholar at the European Central Bank’s Legal Research Program 2020.

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