Supporting innovation should be the driving force behind the EU response to the emerging field of financial technology, European lawmakers said in a draft resolution adopted yesterday (25 April).
The European Parliament’s Economic and Monetary Affairs Committee adopted its report on FinTech: the influence of technology on the future of the financial sector, on Tuesday (25 April).
The plenary vote is expected at the end of May.
The message is crystal clear, “It is too early to regulate”, said Cora van Nieuwenhuizen, a Dutch MEP from the liberal ALDE group in the European Parliament, who authored the report. She was speaking hours before the vote at an event hosted by the Association of Chartered Certified Accountants and EY, a consultancy firm.
The Dutch MEP referred specifically to blockchain, one of the most promising innovations in the realm of FinTech.
Blockchain is a public distributed ledger which is seen as a promising innovation that could eliminate the need for a third party in any transaction. But so far its application has been limited to power Bitcoin, the popular virtual currency.
According to van Nieuwenhuizen, the EU should adopt the opposite approach and spur innovation.
When it comes to blockchain, the lawmaker pointed out that the bloc lacks the right “starting position”, given that the big European banks faced legacy issues as they struggle to adapt to new technology.
Money for talent
Besides, Europe does not have “the best legislation” to support this new ecosystem. And it is finding it difficult to fill the skill gap and to attract talent with generous remuneration, she added.
“If we are not at the table, we will be on the menu” in the global race, van Nieuwenhuizen warned.
In order to avoid stiff rules which punish startups and companies disrupting the financial sector, Parliament’s draft report stressed that the legislation and supervision for FinTech should be risk-based and proportional.
MEPs stressed that the EU rules should also be frequently revised in accordance with the “innovation principle”, in order to prevent regulations from hampering the emergence of this new sector.
The European Commission shares the legislators’ view, in particular when it comes to blockchain.
Tobias Mackie, the executive’s blockchain expert and a member of the Commission’s FinTech task force, pointed out that it is “too early to contemplate regulatory solutions”.
He said that the best thing the EU can do at this stage is to look at the potential applications for blockchain.
Mackie stated that the European Commission’s primary focus is on the opportunities that distributed ledgers could bring, and reflect on what Europe could do to be more “open” and “competitive” in this cutting-edge field.
Privacy breaches and financial instability are part of the risks brought by this unregulated fast evolving field. However, the European Commission and the Parliament kept a positive tone in relation to FinTech.
The MEPs noted that financial technology could bring “considerable benefits”, including “faster, cheaper, more transparent and better financial services for consumers and businesses, and open up many new business opportunities for European entrepreneurs”.
FinTech could also increase access to capital, and help address regulatory and compliance requirements “more effectively”.
This positive view represents a stark contrast with the legislature’s gloomy view on the impact of robotics and artificial intelligence.
But MEPs also expressed some concerns about the “increased use of unpermissioned blockchain applications, in particular, Bitcoin, for criminal activities, tax evasion, tax avoidance, and money laundering”.
The only concrete proposal is a call to the Commission to organise an annual multi-stakeholder conference to address the use of blockchain for illegal activities.
While the executive and legislators agree it is not the right time to come up with new laws, they backed innovative solutions to be prepared to regulate the “complex” FinTech services.
They supported “controlled experimentation”, or the so-called ‘sandboxes’, as this approach and the dialogue with FinTech innovators “can help supervisors and regulators to develop technological expertise”.
Mackie told euractiv.com that the Commission is discussing how to make the best use of these solutions, including cross-border sandboxes.
However, he said that this approach sparked some “controversy”, as there is a “genuine misunderstand” among some member states about what it means.
Sandboxes for FinTech have been embraced by financial hubs like the UK and Singapore. But some EU governments believe it brings a waiver for incumbents and new financial players.
Farid Aliyev, Senior Financial Services Officer at BEUC, the European Consumer Organisation, said: “The European Parliament is rightfully calling for the regulation of fintechs at EU level. Fintechs are digital services that can more easily operate across borders, which is why we need a European rulebook. While most Fintech providers are already covered by EU legislation, some are not.
“Services like peer-to-peer lending and crowdfunding are opening up a wealth of opportunities and benefits for consumers. But it’s important that consumers are protected when something goes wrong", he added.
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.