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Risk-averse US regulators at odds with fast-changing tech

➤ Slow, risk-averse regulation doesn't work for rapidly changing technology, Jo Ann Barefoot says.

➤ The former regulator called for a transformed regulatory system by 2024.

➤ Barefoot sees regulations written in code and implemented directly in machines as the "most exciting" transformation.

Jo Ann Barefoot has spent much of her career advancing financial regulation. She headed the consumer financial regulatory and privacy advisory teams as a partner and managing director at KPMG Consulting. She served on the staff of the U.S. Senate Banking Committee. Barefoot became the first female Deputy Comptroller of the Currency in 1978.

Now the CEO of Barefoot Innovation Group LLC and co-founder of Hummingbird Regtech Inc., a compliance-focused technology startup, she argues that the U.S. lags other countries in financial technology regulation in part because of the sheer number of federal and state bodies that oversee financial institutions.

Barefoot sat down with S&P Global Market Intelligence in Las Vegas to discuss regulatory transformation and the lack of diversity in the fintech industry. What follows is an edited transcript of that conversation.

SNL Image
Jo Ann Barefoot, CEO of Barefoot Innovation Group LLC
Source: Barefoot Innovation Group LLC

S&P Global Market Intelligence: How do you describe fintech regulation today?

Jo Ann Barefoot: Federal regulators in the U.S. have a hard road ahead.

How are they going to figure out what data should be used in underwriting a loan? How are we going to use artificial intelligence? How are we going to protect privacy amid this explosion of data?

We've gotten innovation to the top of the agenda at most of the agencies. That's going to make regulation move faster, but it's still slow. Regulators are built to be deliberative and risk averse.

That may have served us well over the centuries, but it doesn't serve us well when the main thing changing finance is exponentially changing technology. The faster the tech changes, the more risk there will be in the regulatory system.

How can we change the regulatory process?

[In a group of] top regulatory and technology experts, I asked how many had ever written a law or regulation, and a lot of hands went up. Then I asked how many of them could write code, and a lot of hands went up.

Then I asked how many could do both: There was one guy in the room out of 50 who raised his hand.

The regulatory experts know we have a problem of making regulation efficient and effective, and they think that it can't really be solved. The tech people have the solution, but they either don't know about the problem or don't think it's interesting.

We should take a page from tech innovators: Pick a pain point — preferably one shared between government and consumers — and create a digitally native approach to that problem.

Which pain point will the industry address first?

Anti-money laundering is at the top of the list for many people. There is about $2 trillion a year in laundered money. We're spending tens of billions of dollars a year to catch less than 1% of that because we're using old technology and old regulations.

[But] the most exciting pain point is not the first that will come to fruition. In the U.K., the Financial Conduct Authority has tested machine-executable regulation, where the regulator issues a rule in the form of code rather than words.

[Imagine there is] a new regulation or a new law that requires a regulator to collect different information from a bank. I can give the company a piece of code to plug into its system, machine-to-machine, and it'll be able to report the information automatically.

That process today typically takes a couple of years. An experiment [with machine-executable regulation] did it in 10 seconds.

That could massively cut costs and even improve the information.

What timeline for regulatory transformation do you expect?

I have a very ambitious goal that we should create consensus for a transformed [regulatory system] by 2024.

The whole system will not change in that time, but we need to lay down a design. We need consensus from the tops of the regulatory agencies, the standard-setting bodies, the industry and Congress. That pathway is difficult but worth it.

You were at the OCC during another time of transformation. Can you talk about your experience as the first female Deputy Comptroller of the Currency?

I was the only woman in the senior ranks at the OCC at the time.

The first time I briefed the regional administrators, most of them just kind of looked at me like, 'What is going on here?' But we began to move the culture.

We still have such a challenge in regulation and finance, and now in fintech, to have more diversity. We need more women in leadership roles.

You describe yourself as an angel investor. Have you seen female representation in fintech change over your time investing in startups?

Yes, but it's slow going.

Finance and government regulation have both been traditionally male-dominated. Leadership came up through the ranks over the decades and moved up the ladder to the top.

In the tech world, young people could be leaders. They rose not by climbing the ladder but by creating something. Somehow, [these new tech] founders are also mostly men.

People need to back female founders, and founder teams need to bring in women and other underrepresented minorities. Tech is going to dominate the century, and we need to have diverse leadership in it.