Brussels eyes EU-wide licence for FinTech startups

Smartphones, artificial intelligence and blockchain are disrupting the financial services across the globe. [Japanexpertna.se/ Flickr]

The European Commission wants to create a special regime to attract FinTech companies in Europe and help the old continent compete globally on this promising new market, EU sources told EURACTIV.com.

The Commission is considering a single EU-wide licence allowing tech companies in the financial services sector to operate across Europe.

Part of the plan to boost the burgeoning FinTech sector is the creation of a pan-European “sandbox”, or special regulatory framework, for the whole Union, EURACTIV has learned.

Some of the most advanced countries, including the United Kingdom, Hong Kong and Singapore, are already using sandboxes as a way to encourage FinTech startups without swamping them under regulation and paperwork.

In return, authorities get first-hand experience of the risks and challenges emerging  from this new sector and find the best way of addressing them.

Is Europe ready for FinTech?

EU policymakers are devoting increased attention to Financial Technology (FinTech), reflective of the sector’s growing opportunities, investor and media profile.

In order to sound out stakeholder views and fine tune its proposals, the Commission will launch a public consultation on FinTech today (23 March).

The consultation document, seen by EURACTIV, will address the management of the vast amount of information gathered by the sector. Some of these startups base their business models on applying artificial intelligence to the world of “big data”.

The Commission will look specifically into privacy concerns raised by the use of self-learning machines and algorithms that gather financial data and process the information, EU officials explained.

Future EU rules will also seek to clarify data ownership principles, an issue that has become increasingly prevalent in the context of the fourth industrial revolution, or Industry 4.0.

Principles

In its consultation document, the Commission states that its stance on FinTech is based on three principles.

  • First, it has to be technology-neutral to ensure that the same activity is subject to the same regulation, irrespective of the way the service is delivered, in order to preserve a level-playing field;
  • Second, it must be proportional, according to the business model, size, systemic significance, complexity and cross-border activity of the entities;
  • Finally, it has to enhance integrity, as the use of technology should promote more market transparency without creating unwarranted risks, including market abuse, misselling, cyber security issues and systemic risks.

The goal of the consultation is “to create an enabling environment, where innovative FinTech products and solutions take off at a brisk pace all over the EU, while ensuring financial stability, financial integrity and safety for consumers, firms and investors alike,” the document reads.

Insurers and blockchain

The Commission will also look into the implications of data analytics and sensors in the insurance sector. The EU executive is indeed wary of potential discrimination and privacy issues raised by tailor-made pricing of insurance products according to gender, age, social or cultural background.

One part of the consultation is dedicated to blockchain, the distributed ledger technology that could disrupt the financial services industry.

In Barcelona, cutting-edge technologies struggle to demonstrate their potential

As the Mobile World Congress continued, the “father” of Li-Fi said his LED-based wireless connection technology deserves EU support, while Blockchain developers defended the positive impact of the public ledger on society at large.

But the Commission is cautious about its potential because applications have to be fully tested. Besides, blockchain faces numerous challenges in terms of scalability, interoperability, standards and governance, personal data protection and digital identity management.

In addition, applications involve substantial legal risks, including the jurisdiction applicable or the legal recognition that blockchain data is genuine and accurate, and has legal value. And finally, it can bring new risks to financial stability.

Avoid excess of regulation

Commission Vice-President Valdis Dombrovskis, in charge of financial services, will outline the EU strategy for FinTech today. He will speak at a conference organised by the Commission, titled “Is the EU fit for new financial technologies”.

The conference will look at how the technology is transforming the world of finance, regulatory and supervisory innovation, and security aspects, given that trust and confidence may be more difficult to uphold in the digital world.

Commission champions 'laissez-faire' in first response to FinTech revolution

The digital revolution in the financial sector will get a helping hand from EU regulators later this year when the European Commission tables new proposals for retail financing, with a clear objective: let the revolution flourish.

The Commission’s view is that the best approach to deal with this emerging sector is to wait and see how these companies develop.

EU officials believe that an excess of regulation at this stage could kill innovation on the continent, warning that startups in Berlin, Paris, Amsterdam and Barcelona could end up moving to the US or Singapore.

With an appropriate regulatory framework, and instruments such as an EU licence, the Commission hopes to support companies interested in remaining in Europe and capable of competing globally.

A similar hands-off stance was expressed by the previous US administration when Dombrovskis crossed the Atlantic last year.

Although it remains to be seen whether Donald Trump will maintain the same approach, EU officials warned that if Europe does not offer a similar breathing space, firms would struggle to flourish globally.

As part of its efforts to find the right regulatory response, the Commission  set up a multidisciplinary Task Force on Financial Technology including services working on financial regulation, technology, data, access to finance, entrepreneurship, consumer protection and competition.

Positions

IMF Managing Director Christine Lagarde wrote on a blog post on 21 March: "FinTech innovation has come in many shapes and forms—from peer-to-peer lending, to high-frequency trading, to big data and robotics. In order to deal with risks affecting the financial stability, questions abound.  Should new technologies—often driven by algorithms—be subject to the same type of regulation used in the past? Or are new regulatory approaches needed for evolving technologies?  Can the forces of innovation help reduce risks and maximize benefits?”.

The IMF published last year a paper on virtual currencies, and now its focus is on blockchain. Recently established a High-level Advisory Panel of Leaders in Fintech, and will publish a new study on fintech in May.

Background

While technological innovation in finance is not new, investment in technology and the pace of innovation have increased significantly in recent years. Among other things, technological innovation is driving social networks, artificial intelligence, machine learning, mobile applications, distributed ledger technology (DLT) cloud computing and big data analytics.

FinTech should be able to offer solutions to increase cost efficiencies, address users' complex needs and generate value for the economy. But in order to deliver, appropriate policies on important issues, such as access to technology, data standardisation and security, personal data protection and data management, need to be put in place.

European Commission’s public consultation includes four sections:

  1. Fostering access to financial services for consumers and businesses
  2. Bringing down operational costs and increasing efficiency for the industry;
  3. Making the single market more competitive by lowering barriers to entry; and
  4. Balancing greater data sharing and transparency with data security and protection needs.

The first block will explore what benefits FinTech can offer to consumers, investors and firms, but also potential challenges and risks.

The second part will look at how this nascent sector can improve services, by reducing operational costs and increasing efficiency in the EU financial services. But it will also look at challenges such  as financial stability and financial sector employment.

Section three will explore competitiveness gains for the single market, as FinTech lowers barriers to entry for newcomers, while preserving fair competition, a level playing field and incentives to innovate. This section also explores how regulators, supervisors and industry can best support innovation in the financial sector.

The final part will look at the data management, to ensure that individuals' need for privacy is guaranteed and control their personal data.

Further Reading

  • European Parliament: draft report on "FinTech: the influence of technology on the future of the financial services"
  • IMF: Managing Director Christine Lagarde post on "FinTech: a brave new world for the financial sector?"