From the U.S. Government Accountability Office, www.gao.gov Transcript for: Additional FinTech Regulatory Oversight Description: While emerging financial technologies have been making news of late, we explore some FinTech risks for consumers. Related GAO Work: GAO-18-254: Financial Technology: Additional Steps by Regulators Could Better Protect Consumers and Aid Regulatory Oversight Released: March 2018 [ Background Music ] [ Lawrence Evans: ] We really need proactive, collaborative, regulatory approaches. [ Matt Oldham: ] Welcome to GAO's Watchdog Report, your source for news and information from the U.S. Government Accountability office. I'm Matt Oldham. Last year, we made a Big Bite edition of the podcast looking at emerging products and services in the financial technology industry or FinTech. And it's no secret FinTech services have exploded recently. Whether it's mobile wallets, virtual coins, or robo-advising--these services are digital, online, and fast. Recently, I sat down with Lawrence Evans, a director on our Financial Markets and Community Investment team, to talk about GAO's latest on FinTech. Lawrence, what exactly are we talking about when we're saying FinTech? [ Lawrence Evans: ] So, we are talking about technology infused into the financial sector. And that's always been with us. But in this case, it's new technologies, virtual currencies. It is marketplace lending where people are securing loans online exclusively. And outfits are using novel data and algorithms to price risks. So it's an interesting combination of new technologies that is potentially transforming the financial landscape. [ Matt Oldham: ] Okay. So what has changed with FinTech is this sector from last year's report? [ Lawrence Evans: ] So you see, regulators are coming forward to offer some additional clarity for people who are understanding the technologies that are out there, their possibilities. You're seeing new things like initial coin offerings, which people, I mean, when you think about how people raise money on the stock market, you know, they issue stock, IPOs. Now people are issuing virtual currency. And folks are using that as a capital raising opportunity. So you're seeing a lot of new innovation in the space. And it's fast moving. So if you ask me this question in two weeks, you'll get another answer. [ Matt Oldham: ] Last year, we looked at some of the benefits. Are we getting a better picture of what some of the risks are? [ Lawrence Evans: ] Here's what we know. We know some of the risks are, you know, the same risks that you see with traditional financial products. There's a risk that you might secure a loan on higher terms than you should have. You could get unsuitable advice from a robo-adviser. You could find yourself experiencing an unauthorized access to your account. But then there are also new risks, right. If you lose your password in some virtual currency worlds, you lose access to that money. [ Matt Oldham: ] So in light of what you've just said, how confident should consumers be in using some of these new technologies? [ Lawrence Evans: ] That's an excellent question. You know, in some cases, you have full coverage, right. So these firms aren't operating in the Wild Wild West. You know, they're subject to oversight. You have the same legal protections. But, you know, consumers should know the terms and conditions associated with each product. They should know what data is being collected and how that data is going to be used, where to turn to if things go wrong. And so, that is important so that consumers don't become overconfident in this space. [ Matt Oldham: ] We're talking about technology that has a global reach. [ Lawrence Evans: ] That's right. [ Matt Oldham: ] Did this report look beyond our borders? [ Lawrence Evans: ] You nailed it. That's right. So technology crosses borders. We see innovative things going on in other countries. And so, we wanted to look abroad to see how regulators were fostering innovation and overseeing this industry. And so, we looked at the UK, Singapore, Hong Kong, Canada, to some extent, and we saw some pretty innovative approaches to regulating FinTech that we thought might be useful lessons learned for US regulators. And what we learned when we looked overseas is that they had really interesting approaches to help FinTech firms learn about compliance. One is a regulatory sandbox, which is just like your kids playing in the sandbox; it's a safe place to play. It encourages responsible innovation and helps the FinTech firm learn about the world in which they're operating, and also gives regulators a chance to learn about the new products. And this is important for things like blockchain, which is so new. I mean, it's almost reminiscent of what we experienced in 1970s when we heard about the Internet protocol. We had no idea where that would take us. Blockchain is like that, right. And so, to be able to see that develop in an environment where you can really learn about the specificities of the product I think is something useful that we could take and apply here in some manner. [ Matt Oldham: ] What do you think some of the challenges are that are looming for FinTech? [ Lawrence Evans: ] Well, the financial system is one of the more heavily regulated sectors of the economy, for good reason, right. When the financial sector sneezes, the rest of the economy gets a cold, right. We want robust consumer financial protections, safety and soundness, financial market integrity. So navigating this fragmented, complex, regulatory structure is going to be the challenge going forward for FinTech companies because they want to ensure that they're compliant with the rules and regulations governing this space. [ Background Music ] [ Matt Oldham: ] So it sounds like regulators have some catching up to do, as financial technologies continue to change and advance. I asked Lawrence to walk me through his team's recommendations. [ Lawrence Evans: ] Because of the fragmented nature of the regulatory framework and the fact that, you know, FinTech cuts across so many different jurisdictions, we are recommending robust, collaborative efforts. That's ensuring the right agencies are at the table, you know, for these collaborative efforts. And we want to ensure that they're tackling some of the pressing issues. So we've made some recommendations in that space. And also, we want them to glean lessons learned from what's occurring overseas and tailor those approaches as appropriate for the US context. [ Matt Oldham: ] And what do you think people should take away from this report? [ Lawrence Evans: ] So technology is upon us, right. And so, to harness it, to harness the benefits and the possibilities of FinTech, we really need proactive, collaborative, regulatory approaches because that would lead to right size regulations that secure the benefits, mitigate the risks, and really leverage the opportunities that are presented at this time. And this report does a good job of pulling all that together. [ Background Music ] [ Matt Oldham: ] Thanks for listening to the Watchdog Report. To hear more podcasts, subscribe to us on Apple Podcasts. [ Background Music ] [ Matt Oldham: ] For more from the congressional watchdog, the U.S. Government Accountability Office, visit us at gao.gov.