WASHINGTON, Aug 1 (Reuters Breakingviews) – Technology companies have stormed the consumer finance tapes, but they don’t face the regulation that vexes their old-world rivals. Although no financial watchdog oversees Apple (AAPL.O)amazon.com (AMZN.O) or Meta Platforms owned by Facebook (META.O), that could change. It all depends on the views of a watchdog panel known as the Financial Stability Oversight Council.
When a company like apple decides to offer financial services, the potential impact is enormous. Grab the iPhone maker’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, effectively managed by Goldman Sachs (GS.N), lending decisions and financing for buy-now-pay-later loans are proprietary to Apple. Tim Cook’s company is doing a bit of Citigroup (CN) or Bank of America (BAC.N) it does, but without the onerous regulation.
It’s a matter of potential rather than actual risk. Imagine that half of iPhone users in the United States, or about 59 million according to Counterpoint research estimates, end up using the paid service. That would give Apple about as many customers as General Electric (GE.N) financing arm, GE Capitalhad in 2013. GE Capital required a bailout to shore up nearly $140 billion of its debt after it defaulted during the 2008 financial crisis.
The cloud divisions of the Silicon Valley giants also play a systemic role. Bigger banks like JPMorgan (JPM.N) you rely on Amazon and others for various tasks, such as housing data, processing transactions, and running applications. About 45% of banks use Amazon, while a similar proportion rely on it Microsoft (MSFT.O), with many using both, according to S&P Global’s 451 Research. An outage or failure due to a hack or natural disaster could disrupt operations and cause panic.
In GE’s case, it was the FSOC that stepped in when it became clear that the regulatory framework had holes. The 15-member panel was created after the 2008 financial crisis and now includes Treasury Secretary Janet Yellen, Federal Reserve Chairman Jay Powell, Securities and Exchange Commission chief Gary Gensler, and the head of the Consumer Financial Protection Bureau, Rohit Chopra. The board designated GE Capital as a systemic risk in 2013 and placed it under Fed supervision, where it remained. until 2016.
Technology companies would be a timely choice for FSOC. The group does not perform day-to-day monitoring functions, but may delegate these tasks to an appropriate panel member. The Fed also took over oversight of insurer AIG (AIG.N) after the financial crisis of 2008. Other FSOC members have their own expertise: the SEC is over capital markets, for example.
And as with GE, it shouldn’t throw a regulatory net around an entire company. Apple, for example, could be asked to turn its subsidiary Apple Financing into a separate holding company, which could then be subject to rules on underwriting, credit quality and stress testing. Cloud companies like Amazon Web Service or Microsoft Azure could be considered systemically important financial utilities, a label already applied to other forms of market plumbing like the Chicago Mercantile Exchange.
None of this would stop the financial march of tech companies, but it would slow them down. Regulated entities should have their own chief executive, board and develop rules on cyber security and other areas. British authorities have recently floated a range of options to ensure that the financial system could withstand a cloud computing problem, including regular cyber resilience testing. And financial regulators often parachute examiners into the offices of the companies they supervise, who regularly monitor operations for risk management. It would be an intrusion unknown to Silicon Valley.
Even if FSOC drags its feet, more red tape for tech companies is inevitable. In October, the CFPB asked Apple, Alphabet’s (GOOGL.O) Google and Facebook about their payment systems. The agency can issue enforcement actions for user privacy violations, among other concerns, and Leader Chopra is no stranger to assertively using his position at other regulatory bodies, as he demonstrated when he helped expedite the departure of the then head of the Federal Deposit Insurance. Corporation, Donald Trump appointed Jelena McWilliams.
Still, a more coordinated approach would be better. With billions of users and lax regulation, the risks to consumers and the larger system of big tech companies are growing. Meanwhile, guard dogs often react to past threats. Putting Silicon Valley on FSOC’s agenda would help keep the financial police ahead of the game.
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Editing by John Foley and Amanda Gomez
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