The role of digital technologies in development of financial regulatory governance

Abstract

Financial sector is a frontrunner consumer of digital technologies (European Commission, 2018a, p.1). FinTech is defined by the Financial Stability Board as a “technology-enabled innovation in financial services that could result in new business models, applications, processes or products with an associated material effect on the provision of financial services” (2019, n.1, p.1). FinTechs have attracted great attention for their potentially disruptive impact on financial ecosystem. They represent a great opportunity for democratisation of financial systems and better access to finance, but also a possible risk for financial stability. Regulatory framework is trailing behind fast-moving technological advancements. The UK pioneered regulatory innovation through design of innovation facilitators, namely innovation hubs and regulatory sandboxes to enhance flexible and supportive regulatory governance of Fintech. Other countries worldwide have been replicating this governance regime. There is an intensification in empirical research on impacts of Fintech and regulatory approaches while only a few regarding Central and South Eastern European countries (Deloitte, 2016; Raiffeisen Bank International, 2019; Kerényi, 2018; Stern, 2017). The focus of this paper is on newest EU Member State Croatia and recently established Innovation hub. The purpose is to examine the level of financial regulatory innovation and potential for transformation of regulatory governance from “command and control” system to more alternative and collaborative approach characteristic for innovation facilitators (Zeitlin, 2010). Research methodology combines secondary data, semi-structured interviews and comparative study of UK’s and Croatia’s approach to financial regulatory governance, using most different case method (Seawright & Gerring, 2008). They are combined to identify similarities and differences in regulatory approaches in order to evaluate impact that Innovation hub could have on alteration in internal culture of Croatian financial regulatory authorities. Semi-structural interviews were conducted during June 2019 with high-level officials and experts from public and private financial sector that is Fintech related. Results point to incremental changes in the governance culture, nonetheless a positive step forward in promoting a culture of dialogue and better policy-making.