Institutional Dilemmas, Friction Mechanisms, and Rule-of-Law–Oriented Optimization Pathways for Local Financial Regulation in the FinTech Era

FinTech is reshaping financial supply through data, algorithms, and platform-based operations, while accelerating the cross-domain transmission of risks. Local financial regulation consequently faces a compounded predicament characterized by regulatory lag, misalignment between authority and responsibility, and insufficient capacity for technology-enabled governance. Situated in an institutional setting in which “financial management is primarily a central government responsibility” coexists with territorially based obligations for local risk resolution, this article integrates doctrinal normative analysis, legal-dogmatic interpretation, and institutional analysis. Building on a systematic review of FinTech’s impacts on “7+4” categories of local financial organizations, the article identifies three interlocking friction mechanisms underlying the ineffectiveness of local financial regulation: (i) an inadequate supply of legal and regulatory norms that opens windows for regulatory arbitrage; (ii) ambiguous central-local boundaries of authority and responsibility that generate incentive distortions and coordination failures; and (iii) delayed governance of data-related risks that exacerbates information asymmetries and induces risk spillovers. Based on a cost-benefit assessment of institutional arrangements, the article proposes an optimization pathway centered on: reconstructing a function-oriented regulatory rule system; proceduralizing central-local coordination and accountability chains; formalizing RegTech under the rule of law; and advancing coordinated data governance. These reforms aim to achieve a dynamic equilibrium between “promoting innovation” and “preventing risks,” thereby advancing the modernization of local financial regulation.