Carney warns on systemic risks of robo-advice and fintech boom

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Bank of England governor Mark Carney has warned that developments in financial technology such as robo-advice will pose a systemic risk if they are not monitored properly by regulators.

Speaking at a G20 meeting in Germany, Carney said the ability of fintech companies to transform banking with the help of technology meant policymakers had to be aware of the dangers.

He said the technology used by robo-adviser firms created a risk of moving significant numbers of clients towards certain assets at the same time, creating volatility and increasing asset prices in the short term.

He said: “In wholesale banking and markets, robo-advice and risk management algorithms may lead to excess volatility or increase pro-cyclicality as a result of herding, particularly if the underlying algorithms are overly sensitive to price movements or highly correlated.”

As a result he urged the Financial Stability Board, of which he is the chairman, to consider the key stability issues with these financial technologies that might affect the financial system.

Carney argued that some systemic risks could be reduced through building a diverse and resilient financial system that included platforms such as peer-to-peer payments companies and payments networks.

However, he said creating “a new financial system for a new age” meant that “some innovations could generate systemic risks through increased interconnectedness and complexity through greater herding and liquidity risks, more intense operational risk and opportunities for regulatory arbitrage”.

Following his remarks, Scalable Capital co-founder & chief executive Adam French says the central bank’s governor has generalised too much on the concept of “robo-advice”.

Speaking to Money Marekting, French says:”Mark Carney is right to be skeptical given the importance of financial stability in creating a well-functioning financial system, however, I see the attack on robo-advice as ill-informed.

“Currently, most investors buy off-the-shelf model portfolios through traditional advice channels which also suffer from herding and channel many clients in to the same positions. Fund managers themselves are also no better at behavioural infallibility when it comes to keeping away from the herd.”