In recent years, with the rapid advance of such information technologies as big data, cloud computing, and mobile internet, internet finance has being increasingly popular and extended its reach to almost all financial sectors. As a new thing, internet finance is challenging the original pattern of interest distribution and shattering the monopoly of traditional finance. In my opinion, an innovatively regulatory system fit for internet finance should be put in place as soon as possible. Acting as a safeguard, the system is intended to help us ride on the rise of internet finance. With it, internet finance can advance normatively without incurring risks and contribute to the innovation in and green development of financial market.
Based on the contemporary information technologies, internet finance is a new type of financial service that was born in conformity with what the modern financial needs. Its features like low intermediate cost, easy operation and high efficiency help it carve out a place in the modern finance. In his report on the work of the government in 2015, Chinese Premier Li Keqiang mentioned internet finance for multiple times, quoted as saying “internet finance rose swiftly to prominence” and “to encourage the healthy development of internet banking”. The Guiding Opinions of the State Council on Actively Promoting the “Internet Plus” Initiative released on July 4, 2015 also raised new working requirements with regard to improving the regulation for internet finance, enhancing the security of financial services, and effectively preventing the risks arising from internet finance and its spillover effect. Internet finance can render customers new types of financial products in a brand new financial form and meanwhile meet the needs of micro, small and medium-sized enterprises, innovative companies and individuals for investment and financing. From either of the abovementioned two perspectives, it can be deemed as a practical manifestation of inclusive finance. As long as put under efficient regulation, internet finance will be bound to give the Chinese economy a shot in the arm.
As a much-needed supplement to the investment and financing functions of mainstream financial institutions represented by banks, internet finance manages to drive up the utilization rate of private capital and lower down the fundraising cost, thus quickening the changes in the business structure and service philosophy of finance and improving the financial system of the entire Chinese society. At the same time, the trend of financial innovation and cross-sector operation dominated by internet finance is increasingly complicating the Chinese financial market. For instance, the large number of runaway and bankrupt P2P platforms and the online wealth management products with their security under growing scrutiny have been on everyone’s lips. This phenomenon has posed challenges on the original regulatory structure and bodies. It can be seen as a conflict between financial innovation and regulation on the one hand and shed new light to regulatory innovation on the other hand.
Internet finance does need the regulatory and fostering efforts which should focus on solving the current problems and also looking into the future development. What mattered most was to reach a balance between regulation and financial innovation, which was a way to ensure internet finance can maintain innovative vigor and secure healthy development at the same time, according to Professor Huang Yiping, member of the Monetary Policy Committee of the People’s Bank of China (PBC), vice president of the National School of Development under Peking University, and director of the Institute of Internet Finance, Peking University at the “Inclusiveness and Security of Internet Finance” Seminar co-hosted by the Cover Think Tank, Shanghai Institute of Finance and Law (SIFL Institute), and the Internet Legal Research Center of China Youth University of Political Studies in Shanghai. The regulatory authority is expected to put in place the big data-driven regulation step by step, in a bid to strike a balance between “regulation and fostering” and “present and future”, as I recommended.
The control over internet finance relies on financial competence. Only internet knowledge is far from enough and financial expertise is also necessary. Additionally, it is also dependent on financial regulation to a certain extent. The principles and rules governing the traditional financial management cannot be straightly copied without any accommodation. An open mind is needed. Firstly, we should respect the internet spirit that value openness, freedom and responsibility sharing. Secondly, different from giving overprotection in the past, regulation should be built on the trust for the existing generation’s ability to protect themselves, make decisions by themselves and assume risk on their own. Thirdly, Internet finance, disruptive enough, will exert huge impacts on the modern banks and financial institutions. Even so, we should embrace it, instead of negatively waiting or resisting.
The current “disorder” of internet finance is partially stemmed from the mismatch between the existing financial regulatory structure and the financial innovation and cross-border operation. Besides, it may also be attributed to the chaotic understanding of the nature of internet finance and the existing regulatory rules lagging behind the technological development. To solve this problem, what we should do is shatter the original regulatory structure. Specifically, the existing system that governs sectors separately should be destroyed. And the financial business involving products of internet finance should be redefined functionally and the administration of such functions shall be in the charge of corresponding regulatory departments.
The traditional regulatory mode with financial institutions as mainstay should be replaced by the market compliance regulation with negative list supervision playing a leading role. At the heart of financial regulation lie an up-to-standard, systematic supervision system and a timely, integral information disclosure system, in an effort to assure the justice and efficiency of market order.
Sufficient respect should be paid to the legitimate contracts signed by market entities. The target of financial regulation is set to safeguard the efficient execution of contract laws. Determined measures shall be taken to terminate the rigid repayments so that the market can play its leading and decisive role.
It is worth mentioning that the Chinese regulatory authority should take the investor education as a systemic task to carry out in the long run. With investors’ interests well protected, it is recommended to educate them systemically over the long period of time in terms of investment attitude, risk tolerance and basic grasp of investment knowledge. What they should realize that the efforts of regulators to protect their interests are not intended to have their principal guaranteed and instead they are expected to fully understand the relationship between risk and benefit on the premise of production information disclosed according to law and risk alerted adequately. A well-functioning market should be characterized by investors who are always convinced that investment risks are positively correlated with revenues and any attempt to reap considerable benefits at low or even zero risk goes against the basic rules of finance. Additionally, investors should build up the sense of contract so that they can choose financial products at their initiative and assume the incurred risk as prescribed by the contract on their own.
When it comes to regulatory approaches, a credit reporting system of companies and individuals shall be introduced to facilitate the information sharing. At present when the global economy and financial integration are advancing swiftly, China needs a financial system that is able to render individuals and enterprises better financial services, a credit reporting system where banks’ credit information and utility units’ non-banking credit information concerning taxation, industry and commerce, quality supervision, public security, water, electricity and gas supply, communications and others can be shared. These systems are aimed to fill in China’s gap in financial infrastructure, enhance commercial banks’ operating efficiency, stimulate the healthy growth of credit and consumption, optimize the structure of economic growth, give small and medium-sized enterprises an easier access to funds, propel the national economy towards sustained, sound growth, and mitigate the financial risks for the sake of financial stability. At the same time, doing so will help companies and individuals across the entire Chinese society raise their awareness of integrity, which is also pressing and prerequisite for the drive to deepen the reform on financial system.
The big data-driven regulation will be introduced to reshape how financial supervision is conducted. Currently, the financial businesses are undergoing profound changes in China. Advanced information and communications technologies, big data technologies and cloud computing technologies have been widely employed by a wide variety of financial companies. If the financial regulation continues its traditional mode, it is impossible to realize effective, timely and cost-efficient supervision.
The concept of big data-driven regulation has it that the financial big data are used to put the behaviors of the financial system and the risks therein under systemic, normative and forward-looking supervision in a dynamic, real-time and interactive way.
With the advent of big data, internet finance has demonstrated brand new risk features and its management methods are quite different from those of the originally small data administration. Today, it only takes a few minutes for an IT failure to paralyze a whole bank. And it is the only one able to do so. Unlike traditional data with limited attack points, big data have numerous interfaces, which is also a problem for which needs to quicken our research pace. In this regard, the regulatory authority is expected to give internet finance more help and guidance. Banks are in dire need of professionals engaged in big data management. What’s more, few of them are competent both technically and professionally. It is usually seen that engineers know nothing about business while business personnel have no clue about technology. It is impossible for them to communicate smoothly. Therefore, internet finance needs to intensify its team building efforts.
The big data-drive regulation turns out to be a brand new business. However, as a matter of fact, back in the early stage of finance, the financial regulation, restricted by limited resources and asymmetry between cost factors and information, already lagged behind the financial practices so far that the regulator were hardly able to taken timely supervisory measures. In this sense, the advanced technologies of internet finance actually provide a good opportunity which allows the financial regulation to play a greater role. The state-of-art information system could extract the big data from financial markets and companies in a dynamic manner and the electronic channels lower down the research cost substantially. The multiple sources of data can ease the information asymmetry confronting regulators and the machine learning is able to build the smart supervision and detecting system. All these IT-based financial regulatory approaches come from the market and are used to monitor it in turn, which is the inevitable path for financial regulation towards modern operation. Firstly, regulatory efforts are distributed widely and dynamically. The regulation drive by affiliation, business, institution and other factors will give way to the monitoring over data and behaviors behind them. Secondly, different regulators will coordinate to work with each other together. The more closely financial behaviors are being interwoven into people’s daily, the ambiguous the boundaries between financial institutions and non-financial insinuations grow. Such changes will facilitate the cross-sector coordination between regulators of financial entities and non-financial entities. As the exchanges of regulators with data as ties occur more frequently, the regulatory framework and rules should change with times and circumstances accordingly. Thirdly, paired with efficient analysis and presentation tools, big data enable regulator to not only observe the already occurred and ongoing events rapidly but also predict the possible risks and the possibility of the occurrence. By doing so, they can allocate their regulatory resources dynamically.
Internet technologies are bringing the mankind from the industrial age to the era of data. Its fundamental and far-reaching influence will be not second to that of the industrial revolution which uplifted the humans out of the agrarian age. In the predictable future, new products, business modes and organizational structure will pile in and thus the original laws of survival and competition will be rewritten. Just as the climate change led to the Cambrian explosion, every species needs time to pinpoint their position in the ecosystem. A seemingly small intervention may incur the unexpected knock-on effect to the entire ecosystem or even divert its evolution towards an unknown direction. Internet finance should hold regulation in awe and operate compliantly so as to pass the regulatory and compliance tests with due regards.
As the safeguard of the entire ecosystem, the regulatory system and the philosophy behind also face the evolving pressure. Therefore, a sound regulation mechanism characterized with big data should be put in place as soon as possible.
As far as I’m concerned, internet finance constitutes an important part of China’s current structural reform on supply front. With more reasonable regulatory policies, more rational participants and more sound market, the three-pronged internet finance will also become an integral part of the Chinese economy after it entered the period of new normal. By seizing the hard-won opportunities brought by the dedicated crackdown concerning internet finance-related risks, we should put in place sound regulatory policies, create healthy order for operation and competition, expel operating entities who commit irregular or illegal actions driven by evil intentions and give those conducting down-to-earth, honest business with the chance for overtaking their peers, turn internet finance a healthy market segment where the fittest survive, encourage the mass entrepreneurship and innovation, and do its part for the sustainable, healthy development of the Chinese economy.
We have to stay true to the mission and keep moving on. Today, internet finance is undergoing a critical period. As the regulatory policies come into effect, ahead the sector will be a stage of reshuffle and transformation with great pains. Only withstanding all manner of tests, can it build the increasing self-discipline, sound policies, and proper regulation. Becoming orderly and innovative, the sector is able to remove its flaws and grow into a new highlight of the Chinese economy in a real sense.
(The author is from the Green Finance Working Committee of China Biodiversity Conservation and Green Development Foundation.)