Regulating for innovation: an evolving framework

This focus note from Cenfri aims to equip regulators with a decision framework that illustrates the available tools required to regulate for innovation.

Digital innovation is changing the nature of financial markets. Innovation can create opportunities, enhance efficiencies, increase competition, drive scale, and improve the reach and value of financial products and services to consumers. However, with innovation also comes risk, and due to the novel nature of innovation, it is often not fully accommodated in current regulatory frameworks.

Given that innovation brings with it both benefits and risks, it is the regulator’s role to proactively consider the trade-offs between the two:

• On the one hand, the benefits from innovation create an imperative for the regulator to ensure that both the regulatory framework and its actions in regulating do not hamper innovation, but rather promote or facilitate it.
• On the other hand, the regulator has a duty to protect consumers against any risks arising from innovation. The regulator is faced with balancing its mandate to develop the market with its mandate to protect consumers.

The framework serves as a toolkit for regulators on how they can better encourage and facilitate innovation in their markets whilst protecting consumers thereby fulfilling both market development and consumer protection mandates. It depicts the two components of regulating for innovation: one addressing the role of the policymaker, the other addressing the role of the regulator.