While new technologies can help combat certain financial risks, they can also increase exposure to some other risks, or even create entirely new ones, warned Ravi Menon, managing director of the Monetary Authority of Singapore (MAS).
In his keynote speech at the annual forum of the Australian Securities and Investments Commission in Sydney earlier this week, Menon said that cyberattacks, which are harder to detect and often hit multiple targets simultaneously, are a growing threat to the financial sector, and increased adoption of financial technology, or fintech, may increase exposure to this risk.
Menon pointed out that the financial industry has gained lots of benefits from rapid technological innovation, such as the adoption of digital payments, big data, and sophisticated fraud detection systems. However, risks abound, such as runaway algorithms or cyber criminals stealing customer information, as well as potential systemic or macro-financial risks.
Another example he cited was the use of automated financial advisors which operate via software algorithms to recommend an investment portfolio based on investor preferences and automatically rebalances it. These robo-advisors are subject to many of the same risks as traditional human financial fund managers.
“The failure of a robo-advisor could potentially lead to contagion among other algorithm-driven service providers,” he said. “This could present systemic risks if investors seek to withdraw their investments in securities through fire sales.”
Sharing the MAS’s regulatory developments, Menon mentioned the implementation of a regulatory sandbox to test new fintech ideas in a closed and safer environment. The MAS has also begun using methods such as clustering and network analysis in watching financial markets, surveillance of money laundering activities, and blocking financing of terrorism.
“We are working to develop algorithms that can detect and identify trading accounts suspected of syndicated activities,” he said. The MAS also plans to form a dedicated unit for supervisory tech in order to produce a unified effort and improve its capabilities.
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