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Lithuania Central European Hub for FinTech
Effective 22 August 2016
FINTECH INITIATIVE IN LITHUANIA
1. Enhanced Focus on FinTech Lithuania, with its regulatory and infrastructure advantages compared to other EU Member States, is stepping up efforts to become a central European hub for FinTech companies, especially for companies active in the payment and electronic money sectors. Due to recent political changes in Europe, mainly related to Brexit, and increasing interest by FinTech companies from third countries in starting operations in the EU, Lithuania is launching a major review of its regulatory framework for FinTech businesses. On 17 July 2016, the Ministry of Finance affirmed that state institutions would focus more closely on new FinTech and FinTech sector development in Lithuania. According to a press release from the Ministry of Finance, rapid FinTech development worldwide determines the need for more efficient use of Lithuania's potential in this area. With the ambition to become the next FinTech destination in Europe, Lithuania aims to attract FinTech businesses and startups from London and third countries, such as Israel, Russia, Ukraine and Belarus.
2. Existing Advantages Major advantages include, eg: 1) The Bank of Lithuania as the financial supervisory authority in Lithuania can issue a
licence to payment and electronic money institutions within three months. This time limit in practice is five to nine months shorter than in other EU Member States. 2)The Bank of Lithuania has introduced the possibility for payment and electronic money institutions to join the SEPA payment infrastructure and enabled customers to have their personal national codes for IBAN accounts. Accounts opened with payment and electronic money institutions for payments in euro are becoming equivalent to conventional commercial bank accounts. Lithuania is the first country in Europe to create such an infrastructure for payment and electronic money institutions. In comparison, the UK will introduce such a possibility only within the next 2 years. 3)The Bank of Lithuania is also committed not to impose sanctions on enterprises during the first year of supervision. This means that it is using a carrot instead of a stick: developing innovation and exploring unknown territory increase the risk of error, so that the principle of cooperation rather than punishment applies. 4)Lithuania was ranked first in last year's global competitiveness study in terms of meeting the needs of businesses in the area of communication technologies. Lithuania leads the EU in broadband speeds and fibre-optic internet penetration, which is expected increase from the current 72% to 85% by 2020.
FINTECH CARD Lithuania Central European Hub for FinTech
3. Upcoming Regulatory Changes
By 6 October 2016, a working group established by the Ministry of Finance should provide a list of tasks, including required regulatory changes, to enhance the focus on the FinTech sector. The tasks proposed should be implemented within 1 year. Regulatory changes will be shaped so as to help FinTech companies grow and scale up even faster.
Meanwhile, the working group is already busy and has without delay initiated legislative action to change regulation on distant identity verification. According to the upcoming changes in KYC procedure, regulation will allow use of electronic and telematic means for distant identification together with one additional measure, for example, processing an incoming payment from an EEA or equivalent AML jurisdiction bank account in the customer's name. This means that customers will be identified using video calls or by other electronic means such as real-time pictures. This non-face-to-face identification regulation should enable identification of clients from all over the world.
CROWDFUNDING IN LITHUANIA
The Bank of Lithuania and the Ministry of Finance have presented to the market Lithuania's very first draft Law on Crowdfunding. The draft law has already been submitted to the Parliament and is expected to be adopted by the end of autumn 2016. The law will eliminate existing unfavourable regulatory obstacles and set additional requirements for crowdfunding platforms. The upcoming regulation is thus seen as an aid to the market. Due to its existing unfavourable regulatory regime, Lithuania has no crowdfunding platforms except for peer-to-peer consumer lending platforms. Under existing regulation, only credit institutions can operate crowdfunding platforms designed to attract finance to legal persons. Under the draft Law on Crowdfunding, debt and equity-based crowdfunding models will be legalised. The regulatory regime will change so as to help organise easier ways for companies to attract funding through loans or in other monetary form; and issuance of financial instruments. For example, Lithuanian private limited liability companies will be allowed to issue bonds and distribute them through crowdfunding platforms.
Key features of the draft Law on Crowdfunding:
1) Limitations on investment sums. Investors (either natural or legal persons) will be able to freely invest up to EUR 1,000 through a single crowdfunding platform over a 12-month period. This limitation does not apply to informed investors (ie high net worth individuals) and investors that have passed a suitability and appropriateness test to acquire particular financial instruments.
2) The owner of a crowdfunding project wishing to raise from EUR 100,000 to EUR 5,000,000 over a 12-month period must prepare an information document under the Law on Companies. This information document must be approved by the crowdfunding platform operator before a crowdfunding campaign is launched. The owner of a crowdfunding project that seeks to raise more than EUR 5,000,000 over a 12-month period should issue securities in line with the requirements for a securities prospectus.
3) The secondary market for a crowdfunding platform is qualified as a multilateral trading facility. This falls under regulation by the Law on the Market in Financial Instruments, which implements the Markets in Financial Instruments Directive (MiFID) (additional regulation under a separate regime).
4)Only legal entities (ie public limited liability companies and private limited liability companies) will be allowed to act as crowdfunding platform operators. Prior to starting their activities, operators must be included in the Public List of Crowdfunding Platform Operators managed by the Bank of Lithuania. Operators included in the list will be considered to be financial advisory firms under the Law on the Market in Financial Instruments (in other words, a financial advisory firm is a firm that enjoys exemption from Article 3 of the MiFID). According to the Law on the Market in Financial Instruments, a financial advisory firm may provide execution-only services (ie reception and transmission of orders) and offer investment recommendations. The draft law specifically determines that an operator who wishes to provide investment services other than executiononly services and investment services must be licenced under the Law on the Market in Financial Instruments as an investment firm.
5)Other requirements for crowdfunding platform operators, eg: capital requirements, risk management, information to be disclosed to investors, investment agreement, management repute requirements.
PEER-TO-PEER LENDING IN LITHUANIA
Peer-to-peer consumer lending in Lithuania falls under regulation of consumer credit. Lithuania has already established legal requirements for this alternative form of finance. Regulation of peer-to-peer platforms entered into force as of 1 February 2016.
Under the Consumer Credit Law, the main requirements for a peer-to-peer lending platform operator are:
1) The authorised capital of an operator should be at least EUR 40,000. An operator must prepare and approve a business continuity plan setting measures and procedures to ensure that peer-to-peer lending platform activities are carried out continuously and without interruption, as well as ensuring the smooth functioning of consumer credit contract administration and continuous implementation of contractual obligations in case of unforeseen circumstances.
2)An operator must publish certain information about itself and the lending process on its website as well as disclosing certain information to the lender prior to concluding a loan agreement.
3)Legal persons cannot be lenders on peer-to-peer lending platforms and each lender may lend to a particular borrower up to EUR 500 for any 12-month period. The total amount that may be lent by one lender to all borrowers via a single peer-to-peer lending platform is EUR 5,000 for any 12-month period.
4)A platform operator may calculate its commission fee only from repayments already made by the borrower to the lender.
5)Borrowers are subject to creditworthiness assessment, which must be done in accordance with the Law on Consumer Credit.
Currently, legislative initiatives are under way in Lithuania to remove limitations on investment amounts for lenders. This crucial adjustment of the law for peerto-peer platform operators should come into effect by the end of 2016.
Tomas Kontautas Partner Head of the Sorainen Banking & Finance and Insurance Practice Groups
Jogailos 4 LT-01116 Vilnius phone +370 52 685 040 firstname.lastname@example.org
Artras Asakavicius Associate Co-head of Sorainen Lithuania Startup Practice Group
Jogailos 4 LT-01116 Vilnius phone +370 52 685 040 email@example.com
Please note that the Sorainen FinTech card is compiled for general information only, free of obligation and free of legal responsibility and liability. It was prepared on the basis of information publicly available on 22 August 2016. The Fintech card does not cover laws or reflect all changes in legislation, nor are the explanations provided exhaustive. Therefore, we recommend that you contact Sorainen or your legal adviser for further information.
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