No. 200 - Financial innovation oversight: a policy framework

This paper proposes a policy framework for capturing, monitoring and containing the unintended harmful effects of financial innovation. The current approach, adopted by several authorities, makes extensive use of the tools of transparency and disclosure, mainly for consumer protection. It has been increasingly recognized that this approach needs to be supplemented with more stringent organizational solutions, which mainly include corporate governance and risk management. This also comprises responsible risk culture, ethical standards, appropriate incentive structure, accountability, and internal controls, which are related more to "process innovation" than to "product innovation". In addition to retail financial products, the policy framework also deals with the harmful effects of complex and bespoke financial contracts. This paper gives some practical examples of internal governance procedures and suggests a system-wide monitoring method for structured products. It also discusses some more intrusive policy options, including product pre-approval and prohibitions