Digital technology is breaking down barriers to competition in financial services, but it also threatens to create new monopolies and could undermine the safety of the financial system, according to the Murray inquiry’s interim report.
”In some ways, technology is improving competition. It enables consumers to compare and switch between products, making new business models – such as online-only banks and peer-to-peer lenders – viable,” the financial system inquiry’s interim report released on Tuesday stated.
”However, technology also has the potential to reduce competition. Technology is introducing new economies of scale into financial markets.”
It said technology had given businesses access to large amounts of data, for example, and this is becoming more important to understand risks and meeting consumer needs. This meant those with large customer bases had a better ability to develop competitive advantages by ”leveraging their pre-existing data sets”.
The report pointed to several areas where regulation had not kept pace with technology and suggested new approaches to deal with the speed with which the internet and digital devices were transforming the sector. They include setting up a government-led body or ”mechanism” that works with the private sector to monitor changes in the sector to ensure innovation and competition is promoted and financial stability is maintained.
”Various bodies, such as the Council of Financial Regulators and the Financial Sector Advisory Council already monitor developments in the financial system,” it said. ”However, while [they] consider the efficiency and effectiveness of regulation, they do not have particular mandates to consider innovation.”
It also said there was not a ”single overarching technology strategy in place”.
”Such a strategy could consider issues including requirements for electronic disclosures, consumer protection, regulatory perimeter, maintaining a flexible principles-based framework, and updating and implementing the National Cyber Security Strategy.”
Some developments such as digital currency pose threats to the safety of the financial system.
”The safety of funds stored in [unregulated payment providers] may be at risk in the case of system collapse or fraud, which may also occur in a third-party provider associated with the virtual currency,” the report said.
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