FinTech is changing the world of financial services and in doing so challenging financial services firms and regulators alike. By way of a response to this challenge, recent weeks have seen the European Commission publish a FinTech Action Plan while the European Banking Authority (“EBA”) has published a FinTech Road Map. In addition, the Basel Committee on Banking Supervision (“BCBS”) has published a report on the implications of FinTech developments for banks and bank supervisors (the “FinTech Report”).
The FinTech Action Plan
In its latest Action Plan (here), the Commission is proposing a number of targeted measures, one of which comprises a legislative proposal, namely a proposed Regulation on European Crowdfunding Service Providers for Business. This proposal aims to ensure an appropriate and proportionate regulatory framework that allows in-scope crowdfunding platforms that want to operate cross-border to do so with a comprehensive passporting regime, under unified supervision (see our related briefing here).
Many of the other measures are largely exploratory. However, there are some indications of areas in which the Commission is considering the need for future legislative or regulatory measures, including in relation to:
- the adaptation of existing financial services legislation, in particular regarding the application of the proportionality principle;
- crypto-assets and Initial Coin Offerings;
- FinTech facilitators;
- the removal of regulatory obstacles to financial innovation in the financial services regulatory framework;
- outsourcing to cloud service providers and the development of standard contractual clauses for cloud outsourcing by financial institutions; and
- supervisory convergence and enforcement of ICT risk management and mitigation requirements in the EU financial sector.
The Action Plan follows on from a public consultation on FinTech which the Commission published in March 2017.
The FinTech Road Map
In its FinTech Action Plan, the Commission mandates the EBA, along with the other European Supervisory Authorities (“ESAs”) to carry out specific tasks relating to FinTech, for example with regard to authorisation issues, FinTech facilitators, knowledge sharing among FinTech firms, supervisors and regulators, and virtual currencies.
In its FinTech Road Map (here), the EBA sets out its priorities for 2018 and 2019, in alignment with the FinTech Action Plan, and taking into account feedback received to an earlier EBA discussion paper published in August 2017. These priorities include:
- assessing current authorisation and licencing approaches to FinTech firms and analysing regulatory sandboxes and innovation hubs with a view to developing a set of best practices to enhance consistency and facilitate supervisory coordination;
- monitoring emerging trends and analysing the impact on incumbent institutions’ business models and the prudential risks and opportunities arising from FinTech in order to enhance knowledge sharing;
- promoting best supervisory practices on assessing cybersecurity and promoting a common cyber threat testing framework;
- identifying and assessing money laundering/terrorist financing risks associated with regulated FinTech firms, technology providers and FinTech solutions; and
- addressing various consumer risks arising from FinTech in particular in the areas of unclear regulatory status of FinTech firms and related disclosures to consumers, potential national barriers preventing FinTech firms from scaling up services to consumers across the single market and assessing the appropriateness of the current regulatory framework for virtual currencies.
The EBA will also continue to engage in international initiatives to promote supervisory and regulatory consistency in responding to new technologies.
The FinTech Report
The FinTech Report (here) is the result of an analysis conducted by a BCBS task force with a view to identifying and assessing FinTech regulated risks and related supervisory challenges both for banks and bank supervisors. It identifies 10 key implications and considerations including:
- a potentially significant change in the nature and scope of banking risks as traditionally understood due to new technologies;
- the emergence of risks associated with FinTech, including strategic risk, operational risk, cyber-risk and compliance risk;
- the adoption of new technologies to deliver innovative financial products and services, such as artificial intelligence, machine learning, advanced data analytics, distributed ledger technology, cloud computing and application programming interfaces, may pose new sources of risk;
- increased reliance on third-party service providers for operational support of technology-based financial services;
- other issues beyond the scope of prudential regulation including safeguarding data privacy, cyber-security, consumer protection, fostering competition and compliance with AML/CFT; and issues regarding bank regulatory, supervisory and licensing frameworks.
The BCBS also refers to the many positive opportunities presented by FinTech including better and more tailored banking services, lower transaction costs and faster banking services as well as more efficient banking processes and more innovative uses of data for marketing and risk management purposes.