CBIRC to boost analysis, evaluation, supervision of financial innovation

China must pay close attention to the spreading of risks arising from cross-sector and cross-market financial innovation, tighten regulation and strengthen coordination to mitigate potential systemic risks, said an official of the China Banking and Insurance Regulatory Commission.

"Regulators should deeply analyze the essence and risk features of each financial business and clarify whether the business ought to be included in the scope of regulation, which rules it must abide by, and which type of license the business operator should apply for," said Li Wenhong, director of the banking innovation supervision department of the CBIRC, at the 2018 Annual Conference of Financial Street Forum.

"This will help ensure the adoption of uniform regulatory standards across financial businesses with similarities. Such a move will enable regulators to promote fair market competition and curb regulatory arbitrage activities," she said.

"At the current stage of fintech regulation, it is important to stop market players from carrying out illegal fundraising activities or illegal financial businesses without obtaining the appropriate license, in the name of financial or technological innovation," Li said.

Apart from stepping up efforts to analyze, evaluate and supervise financial innovation, regulators must follow the development trends and the level of impact of financial innovation to identify hidden risks in a timely manner and take necessary measures. At the same time, China's regulatory authorities should strengthen communication with their international counterparts to explore ways to improve regulation, shore up weak regulatory links, and continue to focus on the prevention and mitigation of financial risks, she added.

Regulators generally like to do things slowly and on a regularized basis, rather than an individualized basis, and they like to be inflexible, according to Myron S. Scholes, professor emeritus at the Stanford Graduate School of Business and the 1997 recipient of the Nobel Prize for Economics.

"That's because the governance structure is trying to control the bad events, and the hunters are trying to find the good parts of the distribution. So basically that's where the society has to come together in understanding the objectives of innovation …and allow freedom for innovators to create ways in which we can make things faster, more individualized and more flexible," said Scholes.

With constraints, people should realize that the governance structure needs to be there, and there has to be a trade-off between the idea to innovate and the idea to govern, Scholes added.

He expected huge changes to occur in the financial industry and said: "Data are the new key to innovation in the global society. China wants to be and should be on the forefront of this."