By Jim Rusagara
The UK’s FCA has led ‘the pack’ with its Project Innovate and now world famous “sandbox” regime (19 businesses currently operate under this structure). Sandboxes have garnered the most attention in policy conversations and media commentaries of late but surprisingly some important misconceptions remain. Being part of a Sandbox regime does not preclude one from complying with regulation, if anything supervisory monitoring is more intense as chosen businesses must interact with their regulators on a weekly basis. Furthermore, sandboxes are not limited to start-ups. The only major requirement for eligibility is to offer an innovative market relevant project to test in a live setting. Finally, not all sandboxes are made the same, nor should they be. Should the European Commission (EC) decide to venture into an “EU sandbox”, it will have to draw-up its own structure in order to best reflect EU market sensibilities. Merely copying already existing sandboxes would be nonsensical. Similarly to the UK, non-EU countries like Switzerland for example, have managed to create innovation friendly regulatory frameworks that incorporate the needed proportionality and flexibility. With impetus from the Swiss Federal Council, FINMA (Swiss competent regulator) has established a Fintech Desk, created a “Fintech licence” and allowed for real time audio-visual customer on-boarding through video identification.
Germany, the second largest market for FinTech opportunities in Europe and venture capital’s most preferred location on the continent when it comes to FinTechs, has experienced slower regulatory progress despite BAFin’s (competent German regulator) pro-activeness. Having heard positive echoes from German based FinTechs such as N26 regarding the resources allocated to FinTech matters by BAFin, the German regulator continues to make promising headway. Much like the UK, Germany has managed to create an ecosystem around FinTechs which has allowed them to prosper and attract considerable amount of venture capital funding. Surely, there is no coincidence to that fact that Germany is home to the likes of Kreditech, Fidor Bank, AEVI or Raisin to name a few.
Other less ‘FinTech significant’ EU member states also deserve mention as they have recognised the need to act (and done so) at national level. The French government has led (and continues to do so) the way with regards to DLT and virtual currencies. Belgium has passed a crowdfunding law (in French). The Dutch regulators (DNB and AFM), albeit less advanced, have set up dedicated FinTech teams and are currently working on a Government sanctioned plan.
The above short EU overview points to two distinct trends: 1) UK regulators are considerably more advanced than the rest of EU regulators and 2) despite going in the right direction and “waking up” to the changed status quo, EU regulators remain overly cautious. These observations are also translated in policy conversations as regulators such as the French Autorité des marchés financiers (AMF) rejected the FCA’s preference for sandbox regimes, arguing the latter can be exclusionary and enablers of multi-speed competition in financial services. But potentially more disheartening than the latter philosophical disagreements between regulators is the worrying issue of regulatory fragmentation. As described, EU member states have opted to each push national regulatory initiatives and have thereby further accentuated the fragmented regulatory environment in the EU. Consequently keeping potential investors at bay by reinforcing the view that a single market for financial services remains an illusion and finally generally failing to promote EU competitiveness. Surely collaboration between national regulators or better still the aggregation of all national position into a coalesced “EU position” by an EU regulator would facilitate matters for all concerned. ‘Reveries’ aside, can we identify evidence of an EU level solution? Take an example.
In the summer 2014, the European Banking Authority (EBA) provided (on its own volition) an opinion report on virtual currencies. In this first opinion report the EBA attempts to lay the ground work with regards to whether virtual currencies ought to be regulated – policy outcome(s): none. Fast forward to 2015 when German S&D MEP Jakob von Weizsäcker courageously attempted to carry on the momentum in an own initiative report on virtual currencies for the EP’s ECON committee. Despite not focusing sufficiently on the arguably most market relevant aspect of virtual currencies, the underlying technology (DLT) (better known as “blockchain”), MEP von Weizsäcker had the merit to kick-start another wave of conversations on FinTech and DLT across Brussels and potentially beyond. But the policy results remained the same: absent. In its January 2017 report on DLT, ESMA declined to recommend the regulation of DLT because of the lack of market relevance in the EU. The same market relevance argument was also used by the EC when reporting on crowdfunding mid 2016 (coincidentally enough this came in the aftermath of the lending practices scandal of US market place lender Lending Club).So yet again the can was kicked down the road. As a response to the EC’s proposal to amend anti money-laundering legislation to encompass virtual currencies the EBA produced a second opinion on virtual currencies in the summer of 2016. In this second opinion report, the EBA advised against said amendments but favoured the creation of a regulatory regime specific to virtual currencies. Effective policy outcome(s): none. We don’t foresee witnessing chapter 3 of the virtual currency saga in the near future as the EC focuses on more imminent CMU related deadlines and its many on-going consultations.
In addition to the aforementioned example, September 2015 saw the EC launch an expansive and term defining Capital Markets Union (CMU) project with an Action Plan detailing the challenges it had identified as standing in the way of the completion of a single market for financial services. Amongst the latter obstacles a multitude of FinTech relevant initiatives ranging from the promotion of equity financing for SMEs, a venture capital proposal to a disappointing report on crowdfunding (see Annex 1 of CMU Action Plan for more detailed list of initiatives). Once again, very little concrete FinTech enabling policies resulted from the CMU’s early days.
2016 was the year when another EP FinTech related initiative started to see the light of day. This time the liberals (ALDE) took on the challenge and charged Dutch MEP Cora van Nieuwenhuizen with the task to draft an own-initiative report on FinTech. MEP van Nieuwenhuizen completed the latter mission convincingly as she tackled key issues such as favouring activities based regulation (as opposed to legal-entity based), proportionality with regards to risk profiles, the need for regulators to foster “controlled experimentation”, the need for a clear legal framework for Data processing and finally the importance of interoperability and standardized APIs to name just a few. More importantly she took this opportunity to call on the EC to draw up a “FinTech Action Plan”, aimed at reinforcing its Digital Single Market (DSM) and CMU strategies.
Whether the EC finally heard the calls coming from the EP, wanted to avoid a 3rd own-initiative report (the EPP group has yet to spearhead its own report) or is catching up to market developments, its November 2016 announcement regarding the creation of a Financial Technology Task Force (FTTF) certainly caught policy experts’ attention. The latter is to be co-chaired by DG FISMA and DG CONNECT and brings to the table other services responsible for financial regulation and the Digital Single Market. Parts of the EC tasked with competition and consumer protection policy will also take a seat at the ‘FTTF table’.
As we await further detail on the work of the FTTF, the EC’s 2017 pipeline is especially ripe for FinTech contribution(s). Amongst noteworthy opportunities and signals provided by the EC one finds a new and much anticipated Action Plan on Retail Financial Services (Action Plan RFS), a Public Consultation solely dedicated to FinTech, a review of the roles of ESAs and numerous public allusions (by DG FISMA’s Director General Olivier Guersent in March at two distinct events) to the possibility of putting forward an “EU FinTech licence regime” to facilitate the cross-border provision of financial services. All of these new initiatives would merit further lengthy analyses own their own but let us synthesise what one is to gather from them at this point in time: the EC has now laid bare the fruits of 3 years of stakeholder engagement and market observations only to sound-out stakeholders yet again. The EC’s “actions” with regards to reducing regulatory/legal obstacles and supporting development of “an innovative digital world” amount merely to more fact finding missions, consumer credit standards and the consolidation of already existing electronic identity schemes (see p9 to 15 of the Action Plan RFS). Not exactly the coming out one would have hoped for.
But the facts seem to have changed just enough to tilt the default mode from passive to active. We acknowledge that the financial regulatory systems and rules currently in place were built with analog financial services in mind and that we are now on the backend of an unprecedented wave of financial regulation at EU level but the new PSD II Directive has shown that legislators can adapt and provide the EU with the competitive boost it badly needs. Adapting the current regulatory frameworks to the ever innovating market reality will require considerable changes in the way EU institutions think and operate. This will be especially true once the financial services thought leader that is the UK leaves the EU.
Despite a disappointing start, the signals are getting stronger and clearer, but we can’t put our contribution on hold while waiting for the concrete proposals to materialise. At Instinctif Partners we would expect the EC to produce minimal material in relation to the breaking down of barriers favouring cross-border financial services provision in both Q3 and Q4 2017 (access to loans, comparison websites, etc.). We believe the EC’s decision to develop separate EU regimes (on top of existing national structures) for specific products as it did for its EU personal pension product will inform the nature of future proposals. As Q1 2018 marks the due date for the implementation of PSD II, we would forecast a shift of attention from regulators (at national level and then at EU level) to the areas of Open Banking and API platforms. Complementary to the latter, we would also expect data and data protection to be a major concern for both national and EU regulators. This will especially be the case once giant tech companies (Google, facebook, Amazon and Alibaba) have consolidated their foray into Fintech. DG CONNECT and its experience on data protection regulation will be especially useful for DG FISMA when that time comes. However, if past experiences can serve as credible indications of the future, caveat emptor.