The AI Book

CHAPTER 59Is Risk-Based Regulation the Most Efficient Strategy to Rule the Unknown Risks Brought by FinTech?

By Ligia Catherine Arias-Barrera¹

¹PhD in Law, University of Warwick

The process of financial regulation faces the challenge of meeting market needs alongside public expectations. Financial regulators are usually compelled, particularly in periods of disruptive innovations, to react and control the potential sources of systemic risk.

History and the hypothetical scenarios that are somehow foreseeable illustrate the task for regulators when they design the regime. The downside of this process is, however, that almost always innovation-led regulation is exclusively focused on the most prominent areas of concern – the risks that can be easily foreseen, whilst at the same time leaving aside less probable risk. Hence, the use of approaches such as the risk-based regulation (RBR) facilitates the regulator falling into this circle where several types of risks are ignored, and only those risks regulators perceive to be more prominent are regulated.

Manufactured risks are “created by the very progression of human development, especially by the progression of science and technology”. The particular characteristic of this type of risk is that, as it comes with progress and innovation, it can be hardly measured or quantified. The data available from history cannot fully inform the probabilities of occurrence.

Despite the critiques, the adoption of risk-based regulation in a world ...