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Professor about new initiative from the Danish Financial Supervisory Authority: "It gets my alarm bells ringing"

10 YEARS AFTER THE FINANCIAL CRISIS: In sharp contrast to the cautionary tone, which regulatory authorities applied to the financial sector in the immediate aftermath of the crisis, today regulators seek to attract financial entrepreneurs with promises of quick growth and flexible cooperation. The watchdog has become a teammate, and that should make the alarms go off, a researcher points out.

The hangover from the financial crisis at the end of the noughties has apparently subsided. Regulatory authorities are no longer seeking to tighten their grip on market players, but are, instead, seeking closer cooperation with fintech companies - the new players who develop financial services via modern technologies and quick, experiment-driven innovation such as apps for handling accounting and alternative online payment systems. The trend can be seen throughout the world, and in Denmark it is exemplified by the Financial Supervisory Authority’s 'FT Lab', also known as the 'regulatory sandbox', which offers new frameworks for fintech companies such as, for example, assistance in testing the legality of their ideas and in securing permits.

“After a period of reserve and restrictions immediately following the crisis, the authorities have now moved from a controlling and monitoring role to more of a partnership role, helping companies realise their ideas faster. It’s a good idea if one accepts a market-driven logic, as this brings new ideas to the market faster. Conversely, you run the risk of losing the arms-length principle when authorities are spun into the industry in this manner. For example, I heard a civil servant give a speech to people from the financial sector in which he said that, of course, one still had to comply with legislation, “...but,” – at which the audience chuckled knowingly. That makes my warning bells go off,” says Sine Nørholm Just, Professor of Strategic Communication at Roskilde University.

Symbolises a new openness

Sine Nørholm Just is the head of the collective research project, AlterEcos, which is supported by the Velux Foundation and studies alternatives to currently dominant forms of economic organising. In that capacity, she and a group of fellow researchers from CBS have investigated and analysed the rationale behind the regulatory sandboxes around the world. Through the analysis of news coverage, speeches, press releases and official documents, the researchers conclude that the Danish Financial Supervisory Authority and similar authorities around the world are trying to articulate a development from regulation to openness. The logic behind this is that the authorities’ early involvement in the development of new financial technologies and products can create the foundation for responsible growth.

“The sandbox is a metaphor. It is a symbol of a willingness to cooperate, which in the case of the Financial Supervisory Authority, says ‘Come to Denmark, because the authorities have your back’”, says Sine Nørholm Just, who prior to work on the project had mainly evaluated sandboxes, including the Danish FT Lab, to be a way for the authorities to get to know the new technologies better enabling them to spot potential problems - such as a tendency for a market to overheat or outright illegal activities. However, this turned out not to be the case.

“One of the underlying reasons for the severity of the financial crisis was that authorities didn’t know enough about what really went on in the financial sector. The sandbox has the potential to be a place where the authorities cannot merely learn more about the development in the sector, but at the same time regulate it and push it in a more responsible direction. However, this is not at all what is taking place. The discourses and rationales we have identified are very market-oriented, and my analysis is that the sandbox is not creating an alternative to the growth-logic that dominated prior to the financial crisis. To the contrary, it marks a return to that logic and promotes the rationale of the more profits the better,” says Sine Nørholm Just.

A danger signal

If the words and actions of authorities, companies and politicians continuously point in the direction of more lenient regulation, the financial markets may, once again, spiral out of control.

“We have to keep in mind that there was a point in history 10 years ago when the financial crisis was such a shock that everyone agreed that things needed to change radically. Now we see that not much has happened. Instead, politicians are now saying ‘we have over-regulated’ and talk about rolling back the new legislation that was, after all, introduced – with no regard for the fact that, among other things, it was the lack of regulation that led to the crisis in the first place. When the change hasn’t materialised, it is in my opinion a cause for concern, an occasion to think critically, and an invitation to ask if the current development is what we want,” explains Sine Nørholm Just, and encourages ordinary people, whose mortgages and other investments once again risk being hit by volatile market forces, to remain critical:

“As citizens we need to be well-informed. We must ensure that we remember history if authorities do not or if they choose to rewrite it,” she says, referring to a part of the research team’s work that reveals the absence of a balanced public debate about the regulatory sandboxes.

“So far, it is mostly within the world of finance and in what you might call an ‘elite public’ that these themes are being debated. The media coverage has mostly been confined to niche media outlets, and therefore the Danish Financial Supervisory Authority seeks to make itself attractive to companies rather than to offer balanced arguments. The discussions are taking place in an echo chamber, where everyone agrees, and there is a lack of debate among the public at large,” explains Sine Nørholm Just and calls for alternatives to the dominant growth-logic:

“We have to be aware that these things are taking place. The public at large is simply not aware that the Financial Supervisory Authority has switched from being a watchdog to being a partner. More extensive media coverage is needed, and also more research projects like ours that explain the developments and can, perhaps, help to find better alternatives.”

Sine Just
"We have to keep in mind that there was a point in history 10 years ago when the financial crisis was such a shock that everyone agreed that things needed to change radically. Now we see that not much has happened," says Sine Nørholm Just.