On April 28th, the European Parliament’s Committee on Economic and Monetary Affairs (ECON) published a report about Fintech and the influence of technology on the future of the financial sector. The report, prepared by Cora van Nieuwenhuizen, was adopted by ECON with 45 votes in its favour (6 against) a few days prior to its publication. Designed to encourage the EU to further support Fintech development, the report is addressed to the European Commission and is expected to be read alongside the Commission’s Consultation Document on Fintech which was published earlier this year.
The report sets out a number of priorities:
- Defining an EU framework for Fintech: The report calls on the European Commission to present a “comprehensive Action Plan that boosts Fintech in Europe” not dissimilar to those plans developed as part of the Digital Single Market (DSM) or the Capital Markets Union strategies. It does not call for the development of new legislation, but instead for an investigation into those areas where barriers to innovation currently exist. It stresses that the supervisory framework should enable innovation and “level the playing field” for new market entrants by adopting a technology-neutral, risk-based approach with rules that apply equally regardless of the legal entity concerned. Regulators are encouraged to develop sufficient technical expertise in order to adequately scrutinize the new developments in Fintech. The report also emphasises the importance of a “one stop shop” regulator model (not dissimilar to the approach adopted in the General Data Protection Regulation (GDPR) for Fintech service providers and recommends close cooperation between supervisory authorities across the European Union.
- Data: The report recognises that the legal framework around the use of data is complicated with a number of overlapping pieces of legislation, including the GDPR, the Directive on Network and Information Systems (NISD) and the Second Payment Services Directive (PSD2). It suggests a coherent, technology-neutral approach to the application of these different legal provisions and emphasises the need for a free flow of data within Europe in order to scale up innovative finance technologies. The report encourages the European Commission to call for an investigation into a data sharing strategy that gives consumers control over their personal data. In addition, clear rules on: (i) data ownership, particularly where emerging technologies are involved; and (ii) liability provisions associated with personal data generated through algorithms need to be addressed.
- Cybersecurity: In light of the increased number of cyberattacks on both large and small companies, the report highlights the need for end-to-end security across the whole financial services network. It notes concerns about new actors in the financial services market with potentially less sophisticated security measures than more traditional financial institutions. New technologies such as the Internet of Things and digital currencies are also highlighted as requiring additional security measures in light of these attacks. The report also calls for the timely transposition of NISD into national law and emphasises the need for a comprehensive regulatory framework with clear standards and best practices for major incident reporting. The European Commission also reiterated this increased focus on cybersecurity in its mid-term review of the DSM in which it stated its intention to review the EU Cybersecurity Strategy and the mandate of the European Union Agency for Network and Information Security.
- Interoperability: Another issue raised in the report is support for digital interoperability, particularly with respect to the burgeoning “API economy”. It requests special attention be paid to online / e-identification methods which are highly fragmented across the EU and stresses the importance of interoperability between traditional and new payments solutions in order to achieve an integrated European payments market. This message is consistent with the requirements for interoperability set forth in the GDPR and PSD2. The GDPR emphasises the importance of interoperability through its new right of “data portability”, which allows a data subject to receive a copy of its personal data in an interoperable format in order to transfer it to another controller. PSD2 focuses on facilitating interoperability across Europe between account servicing payment service providers and providers of newly-regulated “payment initiation services” and “account information services”.
- Financial stability and consumer protection: The report calls on the European Commission to pay attention to the needs of retail consumers and investors and any risks to them due to the expansion of Fintech services into areas such as peer-to-peer lending and crowdfunding. It stresses the need for financial stability to be increased in parallel to the development of the Fintech solutions.
- Blockchain: Blockchain is also addressed as a potential application for cash and securities transfers as well as “smart contracts”. The report calls for the European Commission to organise an annual multi-stakeholder conference on the benefits and risks of unpermissioned blockchain applications and to closely monitor these developments.
- Financial literacy and IT skills: In light of the increased digitalisation of society, the report calls for the development of a new set of skills resulting from increased technological automation, such as coding. The report encourages the European Commission to address the growing shortage in the labour market of IT professionals. In addition, the report emphasises that the proper financial education of consumers and investors is necessary for Fintech to become a tool of financial inclusion.
The next step is for the full European Parliament to vote on this report during the next plenary session scheduled for 31 May 2017 to 6 June 2017.
On the whole, the report offers an interesting overview of ECON’s priorities and how it envisages Fintech benefitting consumers and the economy generally. The report appears broadly in line with other recent pieces of European legislation – namely the GDPR and PSD2 – with respect to its focus on transparency for consumers, interoperability, technical neutrality and ensuring that the EU remains a competitive, progressive place to do business. It will be interesting to see how this report is received in the plenary sessions of the European Parliament and whether input from the larger group will result in changes to the priorities laid out above.
The report comes amidst a number of other publications by regulators in the last few months about developments in the Fintech space. So far, individual regulators have been launching a number of their own initiatives. For example, last month, the Financial Conduct Authority (FCA) launched a discussion on distributed ledger technology as part of Project Innovate (its project to remove unnecessary barriers to innovation in the financial services sector). This discussion also follows on publications by the US Financial Industry Regulatory Authority (January 2017), the European Securities and Markets Authority (February 2017) and the International Organization of Securities Commissions (February 2017). It will be interesting to see if the regulatory focus on Fintech continues and whether the FCA will continue to lead the way in this regard or if the Brexit negotiations will distract from Fintech as a priority.
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