EU regulators seek to shape the future of Fintech

Jonathan Watson

A coordinated pan-European policy for Fintech has moved a step closer, with a new action plan from the European Commission aiming to support the growth of technology-enabled finance firms.

The action plan, due to be launched in spring 2018, could open the door to Europe-wide licences for Fintech companies, easier crowdfunding and peer-to-peer lending, and temporary regulatory relaxations for testing new tech-based financial services.

It follows a consultation last year and the EC’s announcement in September that the European Union’s three financial supervisory authorities would play a bigger role in shaping the development of Fintech firms.

A key policy priority for the EC, Fintech can refer to payments, lending, raising capital and investment management, foreign exchange and money transfer, and robot advisers. It also includes Insurtech – the application of digital technology to insurance – and Regtech, its application to regulatory compliance.

‘‘Early involvement by the EU will prevent member states from addressing this issue at national level, with the associated likelihood of regulatory arbitrage

Josh Hogan, Head of the Financial Services Regulatory Group at McCann Fitzgerald; Young Lawyers Liaison Officer, IBA Banking Law Committee

There are some concerns that EU regulators shouldn’t get so heavily involved in such a fast-moving sector and might struggle to keep pace with Fintech developments. But, according to Josh Hogan, Head of the Financial Services Regulatory Group at McCann Fitzgerald and Young Lawyers Liaison Officer for the IBA Banking Law Committee, in this case there are clear advantages.

‘Early involvement on the part of the EU will prevent individual member states from addressing this issue at national level, with the associated likelihood of regulatory arbitrage,’ he says. ‘It would also be to the distinct advantage of the Fintech sector to have a single set of rules applicable throughout the EU, rather than being required to comply with bespoke domestic legislation in each member state.’

Such a set of rules could include pan-European licences that would enable Fintech firms to passport throughout the EU. ‘That would permit entities operating in the Fintech sector to benefit from wider market access and increased economies of scale,’ says Imelda Higgins, a senior associate at McCann Fitzgerald. ‘This could, in turn, improve the ability of Fintech firms to access funds, allowing them to grown more rapidly.’

The action plan seeks to build on various initiatives by national regulators to support Fintech. In France, Germany, Luxembourg, the Netherlands and other countries, for example, dedicated Fintech task forces have been set up to explore their regulatory response. Many EU member states have also started devising and implementing specialised regulatory regimes – from Fintech licences in Lithuania to ‘regulatory sandboxes’ in the United Kingdom.

Regulatory sandboxes typically involve temporary relaxations or adjustments of regulatory requirements to provide a ‘safe space’ for companies to test new tech-based financial services in a live environment. ‘There would definitely be merits in developing a European regulatory sandbox targeted specifically at Fintechs,’ said the European FinTech Alliance in its response to the EC consultation.

Sergey Filippov, Senior Policy and International Relations Expert at the Single Resolution Board, part of the newly created European Banking Union, believes that national initiatives, though welcome, may end up further aggravating the fragmentation in financial markets.

‘A coordinated pan-European policy approach to Fintech is needed,’ he says. ‘To be sure, national authorities and regulators should be able to design and implement national Fintech-friendly policies; however, the overall guiding principles need to be formulated at the EU level.’

Easier crowdfunding and peer-to-peer lending are key concerns for the Fintech sector. The European Securities and Markets Authority, responding to the EC’s Fintech consultation last year, said ‘particular consideration should be given to the possible development of a specific crowdfunding EU-level regime, which would ensure investors across the EU are equally protected and would enable crowdfunding platforms to operate cross-border based on a common regulatory framework’.

This idea is supported by Diogo Pereira Duarte of the Research Center for Private Law at Lisbon University's Faculty of Law. ‘In Portugal, the national regulatory regime for crowdfunding is impacting very dramatically and negatively on the implementation and development of crowdfunding as an alternative source of financing growing and innovative companies,’ he says.

The EC’s action plan is also expected to address concerns over the security of cloud services, which are becoming increasingly important to the financial sector. ‘A common EU-wide approach to cloud service deployment among regulatory authorities would overcome the current fragmentation of national guidelines, and bring much needed certainty and speed to the cloud adoption process in the financial sector,’ said digital technology industry association DigitalEurope in its response to the EC’s consultation. ‘Ultimately it would bring down operational costs and increase efficiency for financial services institutions.’

Fintech could, however, be a worry for many established banks, as it may make it easier for non-banking rivals to undermine their business. The Bank of England recently included the impact of Fintech on banks’ business models for the first time in its stress tests. It found that UK banks could lose as much as £1bn of profits to new competitors.

‘Fintech will undoubtedly make the banking sector more competitive,’ says Hogan. ‘This is particularly the case in view of the fact that the Second Payments Services Directive will allow Fintech firms to access the vast amounts of customer data which was previously under the control of the banking sector. However, I expect many banks will prove capable of adapting to the Fintech challenge, including cooperating with Fintech firms to provide customers with new and improved services.’