Big Tech in Finance? There is a regulator for that

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 Big Tech in Finance?  There is a regulator for that
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With billions of users and lax regulation, the risks for consumers and the system derived from these companies are increasing.

Tech companies have stormed the heights of consumer finance, but they don’t face the regulation that plagues their old-world rivals. Although no financial watchdog currently oversees Apple, Amazon.com or Facebook owner Meta Platforms, this could change. It all depends on the views of a group of watchdogs known as the Financial Stability Oversight Council (FSOC).

When a company like Apple decides to offer financial services, the potential impact is enormous. For example, the iPhone manufacturer’s new “buy now, pay later” service. Start small, with six-week loans and a $1,000 loan limit. But unlike the Apple-branded credit card, managed by Goldman Sachs, the lending decisions and financing of “buy now, pay later” loans are made by Apple. Tim Cook’s company does something similar to what Citigroup or Bank of America do, but without having to deal with onerous regulation.

It is a question of potential rather than actual risk. Imagine that half of the iPhone users in the United States, that is, about 59 million according to the calculations of Counterpoint Research, end up using the installment payment service. That would give Apple as many consumer customers as General Electric’s financing arm GE Capital had in 2013. GE Capital needed a bailout to back nearly $140 billion of its debt after it fell apart during the 2008 financial crisis.

The cloud divisions of the Silicon Valley giants also play a systemic role. Larger banks like JPMorgan rely on Amazon and others for a variety of tasks, including hosting data, processing transactions, and running applications. About 45% of banks use Amazon, while a similar proportion rely on Microsoft, with many using both, according to S&P Global’s 451 Research. An interruption or failure caused by a hack or a natural catastrophe could jeopardize operations and cause panic.

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In GE’s case, it was the FSOC that stepped in when it became clear that the regulatory framework had gaps. The 15-member panel was created in the aftermath of the 2008 financial crisis, and now includes Treasury Secretary Janet Yellen, Federal Reserve Chairman Jay Powell, Securities and Exchange Commission chief in English), Gary Gensler, and the head of the Consumer Financial Protection Bureau (CFPB), Rohit Chopra. The Board designated GE Capital as a systemic risk in 2013, placing it under Fed supervision, where it remained until 2016.

Tech companies would be a great fit for the FSOC. The group does not perform day-to-day surveillance functions, but may outsource those tasks to an appropriate member of the panel. The Federal Reserve also took over supervision of insurer AIG after the 2008 financial crisis. Other members of the FSOC have their own area of ​​expertise: the SEC deals with capital markets, for example.

And, as in the case of GE, it would not be necessary to cast a regulatory net around the entire company. Apple, for example, could be asked to spin off its subsidiary Apple Financing and turn it into a separate holding company, which would be subject to underwriting, credit quality and stress test standards. Cloud companies like Amazon Web Service or Microsoft Azure could be considered systemically important financial services, a label already applied to other forms of market like the Chicago Mercantile Exchange.

None of this would stop the financial march of technology companies, but it would slow them down. Regulated entities would have to have their own CEO and board of directors, and develop rules on cybersecurity and other areas. UK authorities recently proposed a number of options to ensure that the financial system could withstand a cloud computing failure, including regular tests of cyber resilience. And financial regulators often send examiners to the offices of the companies they supervise, who regularly check risk management operations. This would be an intrusion unknown to Silicon Valley.

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Even if the FSOC is delayed, there is bound to be more red tape for tech companies. In October, the CFPB asked Apple, Alphabet’s Google and Facebook about their payment systems. The agency can take enforcement action for violations of user privacy, among other issues, and leader Chopra is no stranger to assertively using his position on other regulators, as he demonstrated when he helped speed up the departure of then-CEO. the Federal Deposit Insurance Corporation, Jelena McWilliams, appointed by Donald Trump.

Still, a more coordinated approach would be preferable. With billions of users and lax regulation, the risks for consumers and the system in general derived from large technology companies are increasing. Watchdogs, for their part, often react to past threats. Putting Silicon Valley on the FSOC’s agenda would help the financial police stay ahead.