Fintech and Its Importance for the European Union

Courtesy of Alexandra Andhov

Recent technological advancements have disrupted the financial sector by giving rise to new FinTech start-ups and simpler solutions for customers and investors. While these developments raise a number of legal, regulatory and policy issues, I believe that ultimately, FinTech will facilitate greater financial inclusion and cross-jurisdictional service offerings in the European Union. In a recent article titled ‘FinTech as a Facilitator for the Capital Market Union,’ I describe the existing inefficiencies in the EU capital market and suggest how FinTech might become a tool for opening the jurisdictional borders for financial services in the European Union. This post summarizes my views on a possible union between the development of FinTech and the efficiency of the European Union’s capital market.

Brief Description of the EU Financial Service Market

One of the fundamental objectives of the EU is to provide a properly integrated financial services market, where capital can move freely through the entire area and can be freely raised, invested and spent in any place through any financial intermediary. The free movement of capital includes the possibility of investing and moving capital from one place to another without any kind of restriction or barrier. In theory, EU customers and investors should be able to open an account at any bank in a Member State. They should also be able to invest in a , irrespective of its domicile or seat, and invest in their preferred plan offered by any investment company. While these actions are possible in theory, they are not without their limitations in real life.

The Long Road to a Single Market

The EU has implemented several policy and legislative methods on how to reach the single internal market since its foundation in 1957, but formation had been long postponed. Despite being home to one of the world’s largest international financial centers – London – and the oldest stock exchange – Amsterdam[1] – the EU has struggled to operate an efficient common capital market. The Single European Act clearly set the date for establishing the single internal market by the end of 1992.[2] Nonetheless, this plan ultimately proved inaccessible, and the EU has continued to struggle with finalising the fully operational internal market and removing any remaining barriers to the movement of goods, persons, services and capital, including financial services.[3]

In 1999, the European Commission adopted the Financial Services Action Plan (FSAP), a policy programme aimed at completing the single financial market after the introduction of the Euro and the establishment of the monetary union.[4] The FSAP was a plan – consisting of forty-two measures – for adopting all necessary legislative measures to support a single, integrated financial market by 2005.[5] The FSAP significantly moved the EU towards a fully integrated securities market.[6]

Along with the FSAP came the “Committee of Wise Men on the Regulation of European Securities Markets,”[7]  who provided advice on achieving a single securities market in 2001.  Greater EU financial harmonization was also encouraged after the financial crisis by the G20’s reform agenda, which was largely implemented by the Basel Committee and IOSCO.

After the financial crisis, the European Commission released a Green Paper on Building a Capital Markets Union (CMU),[8] which led to the introduction in September 2015 of the Action Plan.[9] The plan’s policy objectives, were to unlock investment, create jobs and growth, and deliver on the commitment that ‘to strengthen investment for the long term, we need to build a true single market for capital—a Capital Markets Union for all 28 Member States’.

CMU is a medium-term project and the reforms are organised around a number of related themes: 1) the ‘path to growth’ (early stage funding for start-ups and for small and medium-size enterprises (SMEs); 2) facilitating company access to the public markets; 3) investing for the long term and for infrastructure and sustainable investment; 4) fostering retail and institutional investment; 5) leveraging banking capacity to support the economy; and 6) facilitating cross-border investing. These themes all relate to the four objectives of the CMU agenda: (i) to unlock more investment from the EU and the rest of the world; (ii) to better connect financing to investment projects across the EU; (iii) to make the financial system more stable; and (iv) to deepen financial integration and increase competition.[10] FinTech provides an opportunity to accomplish these objectives and lead to the completion of a fully integrated capital markets union.

FinTech’s Potential

The CMU Action Plan, despite being adopted in 2015, only mentions FinTech  twice. It recognizes FinTech’s potential as a supporting technology in two areas: advisory services and ‘open access’ online distribution platforms. The CMU Action Plan stipulates that FinTech represents an opportunity in regard to retail investment products, but fails to recognize the broad potential of FinTech.[11] However, the thinking of EU institutions around FinTech has evolved since 2015.

In 2017, the Commission adopted a more focused consultation on FinTech, in which it emphasized the possibility of greater access for investors to financial services, increasing efficiency for the entire financial services industry, and balancing greater data sharing transparency with data security.[12] The Commission also recognized the speed of FinTech innovation and the possible future consequences on non-financial sectors as well as the financial sector.

The European Central Bank and the European Securities and Markets Authority have publicly announced their support of FinTech.[13] In March 2017, the Commission launched a consultation on technology and its impact on the European financial services sector as part of its consumer financial services action plan. More recently, the Commission announced its plan for a pan-EU license for FinTech companies. In March 2018, the Commission adopted an Action Plan for Fintech.[14] The plan sets out nineteen steps the Commission plans to undertake in order to foster a more competitive and innovative European financial sector.

After the adoption of the Action Plan on FinTech, the Commission established an EU FinTech Lab to raise the level of regulatory and supervisory capacity at the EU level. The new EU FinTech Lab met for the first time on 20 June 2018 in Brussels. During its first meeting, the FinTech Lab focused on cloud sourcing for banking and insurance. Based upon available documents, it appears that the Lab represents a group of specialists in the sector that meet periodically to exchange information. This contrasts with the approach taken by the UK, Netherlands, and Denmark who have established permanent regulatory sandboxes that provide actual support to FinTech companies.

Regulatory sandboxes, or regulatory innovation hubs, are growing in prominence around the world. Sandboxes, often established by the financial enforcement agency, involve the granting of licensing exemptions and conditional relief from regulatory requirements, in order to let FinTech companies test their concepts, processes, and products in a controlled environment. Innovation hubs serve as a support system and engage with FinTech companies, particularly in relation to navigating regulatory requirements. Generally, companies have to apply to either test their products in the regulatory sandbox or to obtain support through the innovation hub. By direct conversation and cooperation between the regulators and FinTech companies, sandboxes create a constructive environment for both the FinTech industry and the regulators.[15] Regulators are able to be more adaptive, and avoid over-regulation by learning about emerging financial technologies and adapting their future regulatory processes. This in turn helps ensure that regulatory design is more flexible, dynamic and responsive. Innovations hubs have been introduced in the UK, Belgium, the Netherlands, France, Germany, Italy, Poland and Denmark, whereas regulatory sandbox are active only in the UK, the Netherlands,  and Denmark.[16] FinTech’s full potential in the EU cannot be achieved unless the Commission and other member states are more willing to engage with the industry, ala a sandbox.

Conclusion

Like most regulators and policymakers, the EU has historically been a step or two behind market developments. By establishing a FinTech regulatory sandbox, instead of another bureaucratic committee, the EU can facilitate meaningful dialogue businesses and regulators. In my paper, I elaborate further on the importance of such a support system for both FinTech companies and investors.

FinTech companies have the potential to significantly change the financial services landscape in the EU by attenuating market imperfections, transforming financial intermediation channels, and reducing costs. An EU-based regulatory sandbox can turn this potential into reality.

 

 

[1] The stock exchange in Amsterdam was founded in 1611 and became the main trade center soon afterwards. Available online at: < http://www.beursvanberlage.nl/1611/>/last visited Oct. 22, 2013.

[2] Section II, Art. 13 of the Single European Act O.J. EC No. L. 169/1 (Single European Act).

[3] The provisions of the Single European Act were based on the Commission White Paper: Completing the Internal Market, COM (1985) 310 final (June 28-29, 1985). The White Paper called for removal of all physical, technical and fiscal barriers to the free movement of goods and services between and among the Member States. For more on the White Paper and the Single European Act see Stephen Woolcock, Competition among rules in the single European market in Anthony I. Ogus (ed.), Regulation: Legal Form and Economic Theory (Hart Publishing, 2004).

[4] European Commission, Financial Services: Implementing the Framework for Financial Markets: Action Plan (COM (1999) 232).

[5] FSAP is far-reaching and includes legislative measures covering securities offerings, taxation, of cross-border occupational pensions, prevention of fraud. After the adoption of the proposed directives and regulation, the EU Commission published a report on the economic evaluation of the FSAP in all of three sectors: banking, securities and insurance. The report is available online at: < http://ec.europa.eu/internal_market/finances/docs/actionplan/index/090707_economic_impact_en.pdf >/last visited January 17, 2018. There had been also other reports and inquires carried out, e.g. the empirical Financial Integration Monitor, first published in 2003, which tracked progress towards financial integration under the FSAP.

[6] Dan Prentice & Arad Reisbeg, Corporate Finance Law in the UK and EU 398 (Oxford University Press, 2011) and Niamh Moloney, ‘Financial Market Regulation in the Post-Financial Services Action Plan Era’, 55 Int’l & Comp. L. Q. 982, 982-983 (2006).

[7] The Council (in its Economic and Finance Ministers Formation (ECONFIN) appointed the committee in July 2000. The establishment of this Committee to look at radical opinions for the development of the single securities market was the brainchild of Laurent Fabius, the French minister of finance, ‘A Ragbag of Reform’, Economist 93, March 3, 2001.

[8] Commission, Green Paper on Building a Capital Markets Union COM (2015) 63 final <http://ec.europa.eu/finance/consultations/2015/capital-markets-union/docs/green-paper_en.pdf> accessed 10 February 2018.

[9] Commission, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Action Plan on Building a Capital Markets Union.  COM (2015) 468 final.

[10] Ibid, p. 3.

[11] Ibid.

[12] Commission, ‘FinTech: A More Competitive and Innovative European Financial Sector’.

[13] Patrick Armstrong, ‘Financial Technology: The Regulatory Tipping Points’ (27 September 2016, FMA’s FinTech conference, Lichtenstein) < https://www.esma.europa.eu/sites/default/files/library/2016-1420_financial_technology_the_regulatory_tipping_points_by_patrick_armstrong_0.pdf> accessed 22 February 2018. European Banking Authority, ‘Discussion Paper – on the EBA’s Approach to Financial Technology’ (EBA, 4 August, 2017).

[14] Available online at : < https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52018DC0109 >.

[15] Michael Huertas, ‘The UK FCA’s regulatory “sandbox”: any lessons for the EU?’ (2018) 33(2) J.I.B.L.R. 50.

[16] Regulatory Sandboxes have been introduced in number of other jurisdictions, including Abu Dhabi, Australia, Canada, Honk Kong, Indonesia, the Netherlands, Singapore, Switzerland or Thailand.

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