​Facebook, Google should follow banking rules when venturing to finance, EU advisers say

Facebook, Google and other Big Tech companies should be subject to bank-like restrictions on capital requirements, hiring practices and misselling when they venture into financial services, a group of advisers to the European Commission said in a report published on 13 December 2019.

Social media companies and smartphone providers should also be forced to open up their data and hardware in a bid to level the playing field with incumbent banks and payment firms, said the Expert Group on Regulatory Obstacles to Financial Innovation.

The group, formed in spring 2018 and chaired by London School of Economics Associate Professor Philipp Paech, come as banks and regulators seek to take advantage of financial innovations that could extend from online banking to quantum computers launching high-frequency trades.

But alongside the opportunities, many incumbents are wary that less regulated California giants might encroach on their patch — and they want to ensure everyone is playing by the same rules.

“The commission should introduce rules to ensure that large, vertically integrated platforms do not unfairly discriminate against downstream services that compete against their own similar services,” said the expert group, whose membership is dominated by incumbent financial firms such as French insurer Axa, Dutch lender ING and the London Stock Exchange.

“Without appropriate regulation, these companies could emerge as oligopolies which effectively lock customers into their platforms and promote only their vertically integrated services,” using their dominant position to favor their own business, the report said.

Many banks have complained that existing financial rules tilt the playing field in favor of Big Tech. Under EU payment services laws known as PSD2, lenders are obliged to hand over customer data to technology firms who want to run payment or account services — but the likes of Facebook are under no equivalent obligation.

Financial firms have also complained that Apple can control access to the near-field communications technology on iPhones, limiting payment services to its own Apple Pay system.

That kind of behavior can lead to a “dysfunctional market,” which lawmakers need to head off in advance; competition law would only be able to address the issue once it was too late, the report said.

Meanwhile, financial restrictions that stop insurers cross-selling products like burglar alarms could be relaxed to allow innovation, the report added, urging regulators to keep a close eye on outsourcing to oligopolistic service providers like cloud computing companies.

The report said it takes a technology-neutral approach — but wants to move away from a system based on regulating entities such as credit providers, insurers or payment providers, and toward one that looks at activities.

“The same regulations should apply regardless of whether the activities are led by an incumbent financial institution, Big Tech or start-up,” the report said. “This principle should apply to all types of rules, including prudential rules, organizational requirements or conduct rules.”

Many regulators have so far seemed shy of taking that approach, viewing calls to move away from focusing on entities like banks as a disguised bid to deregulate.

Opportunity and risk

The panel wants to make it easier to innovate and proposed an EU wide “sandbox” to allow firms to demonstrate the worth of new ideas without regulations getting in the way.

Anti-money laundering identity checks could be done by remote video or biometric data, and EU retail-investment laws should do away with requirements to furnish paper documents by default, the report said.

But it also grappled with many of the more conceptual challenges technology brings for finance watchdogs.

Cryptocurrencies such as Facebook’s Libra raise issues of financial stability and money laundering — something EU commissioner Valdis Dombrovskis has said he wants to tackle.

But the use of secure distributed-ledger technology also means crypto assets may be held across a disparate network, making it harder to resolve conflicts of law when allocating the assets of an insolvent company, or winding up a failed bank.

Decisions taken by artificial intelligence may leave would-be borrowers none the wiser why their credit application has been rejected; a move away from bilateral to multilateral or peer-to-peer transactions can cause regulatory problems in areas from securities trading to insurance.

EU data watchdogs also need to figure out how the EU’s data laws — which notably give people the right to delete information about themselves — will apply to data held on distributed ledgers that cannot be erased.

Increasingly high-performance computing could in time be able to breach the cryptographic encoding that keeps many financial transactions secure.

The nexus of finance and technology seems set to offer regulators a significant headache.

A spokesperson for the commission didn't immediately respond to requests for comment.