What has happened?
The European Commission has released a 23-step FinTech action plan, which outlines how it intends to promote the digital transformation of the financial sector to make it more innovative and competitive.
What does this mean?
The financial services sector is the largest user of digital technologies and technological advances are also changing the industry and the way consumers access financial services.
The EU therefore recognises the importance of encouraging the uptake of these technologies.
The action plan follows calls from the European Council and Parliament for a more "future-oriented regulatory framework" that would create an environment where FinTech products can be rolled out across the EU without compromising financial stability or consumer protection.
After spending several months last year gathering views on how best to harness the opportunities presented by technological innovation in financial services, the Commission concluded that the case for "broad legislative or regulatory action… at this stage is limited".
However, the action plan states that initiatives for the EU to make more use of digitalisation are warranted.
These proposals include:
Crowfunding and initial coin offerings (ICOs)
The Commission noticed that new services, such as crowdfunding or peer-to-peer activities, do not always fall fully under the existing EU regulatory framework, with the result that Member States are developing conflicting local regimes.
According to the Commission, this lack of common EU rules hampers the development of crowdfunding in the EU and also prevents crowdfunding providers to scale up. In addition to the action plan, the Commission presented a proposal for a Crowdfunding Regulation, which would ensure that investment- and lending-based crowdfunding services come under a single set of rules.
In this regard, the Commission has mooted the creation of a passporting regime for crowdfunding platforms, which would enable them to offer their services throughout the EU, while investors would be protected by clear rules on disclosure, risk management and governance and a coherent approach to supervision.
On ICOs, the Commission said that the recent "volatility of crypto-assets requires a better understanding of the risks and opportunities that go with their use and a better understanding of the applicability of EU regulation".
The Commission will therefore continue to access the risks and opportunities of ICOs as well as the suitability of the current EU legal framework and whether the EU should take any regulatory action.
Common standards and interoperable solutions
The Commission believes that "an EU-wide FinTech market will not reach its full potential without the development of open standards that... enhance interoperability". The action paper also says that consultation respondents stressed that standardisation is particularly required in the fields of blockchain, application programming interfaces and identity management.
As such, the Commission intends to work with standard-setting bodies to develop a more co-ordinated approach on standards for FinTechs.
The Commission also wants market participants to develop, by mid-2019, standardised application programming interfaces that comply with PSD2, which it sees as "an interesting test case", and the General Data Protection Regulation as a basis for an European open banking system covering payments.
"The development of standardised application programming interfaces would create a level playing field to enable new and improved services in a truly open environment, while maintaining high standards of protection of personal data and consumer protection," it said.
Sandboxes and hubs
To date, 13 Member States have established innovation hubs or regulatory sandboxes – a testing environment where FinTechs work with an authority to test innovative FinTech solutions.
Consultation respondents generally supported the regulatory sandbox approach, but national authorities expressed mixed views on them, with some considering that sandboxes are outside their mandate, while supporters considered that others should take similar initiatives.
The Commission believes that a consistent approach among supervisors would be welcome.
As such, it will present, by Q1 2019, a report on best practices for regulatory sandboxes and the European Supervisory Authorities (the ESAs) (ie, the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority) will also identify best practice by Q4 2018 and issue guidance, where appropriate.
Suitability of existing rules for new technologies
The Commission has identified that some current regulation, such as paper-based disclosure or the need for physical presence, are an impediment to the update of FinTech solutions.
In the same vein, software investment "is less attractive under current prudential rules for banks where investments in software made by EU banks must be deducted from their regulatory capital".
An expert group will be set up to assess, by Q2 2019, the fitness of the current regulatory framework for financial innovation.
The Commission is keen for obstacles hindering the adoption of cloud computing services by the financial industry to be removed.
The Commission acknowledged that the European Banking Authority has already recently published recommendations on outsourcing to cloud services.
Still, it suggested that:
- the ESAs could develop new guidelines on outsourcing to cloud providers by Q1 2019;
- (cloud providers could develop self-regulatory codes of conduct to facilitate switching between providers; and
- contractual clauses for cloud outsourcing by financial institutions should be developed.
EU blockchain initiative
Blockchain has the potential to drive simplicity and efficiency and may become central to future financial services infrastructures.
Considering that the potential for blockchain goes beyond financial services and could encompass all sectors of the economy and society, the Commission has already established an EU Blockchain Observatory and Forum, as well as a study on the feasibility of an EU public blockchain infrastructure to develop cross-border services.
The Commission is now proposing to establish a blockchain initiative, which will propose actions, funding measures and a framework to enable scalability, develop governance and standards, and support interoperability.
EU FinTech Lab
The Commission will host a FinTech Laboratory in the second quarter of 2018 to encourage regulators to engage with FinTechs and better understand the underlying technonolgy.
The initiative would bring together vendors, in particular from the EU, with regulators and supervisors, so that they can discuss regulatory concerns.
The Commission also wants to enhance cybersecurity by, for example, evaluating by the end of the year, the costs and benefits of developing a coherent cyber resilience testing framework.
It also intends to organise a public-private workshop in Q2 2018 to assess barriers limiting information sharing on cyber threats between financial market participants.
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