European Consultation on Fintech

On March 23rd 2017, the European Commission (the “Commission”) issued a public consultation document on Fintech (the “Consultation”).

Core principles and policy objectives

In the Consultation, the Commission outlines three core regulatory principles which characterise its stance on Fintech and which derive from its priority to establish a connected digital single market with the objective of improving access to digital goods and services and to design rules that foster technological development.

The three core regulatory principles are as follows:

  1. Technology neutrality: the same activity shall be subject to the same regulation irrespective of the way of delivery.
  2. Proportionality: any regulation shall take into account the business model, size, systemic significance, complexity, cross-border activity of the regulated entities.
  3. Market integrity: the technologies for financial services shall be used to promote market transparency benefiting consumers and business without creating unwarranted risks.

The Consultation seeks input on whether the current regulatory and supervisory framework fosters technological innovation in line with these principles. The policy objectives are:

  1. fostering access to financial services for consumers and businesses;
  2. cutting operational costs while increasing efficiency for the industry;
  3. creating lower entry barriers for the single market; and
  4. balancing greater data sharing and transparency with data security and protection needs.

Lowering barriers to entry

The Commission seeks to simplify market entry of new firms to stimulate effective competition. Stakeholders are asked to identify regulatory requirements or supervisory practices which hinder the implementation of Fintech solutions, or adversely affect the level playing field.

Subject to safeguards of consumer protection and financial stability, unjustified legal and practical barriers hindering Fintech firms across the Single Market must be removed. To achieve this objective, the Commission considers a number of different means:

  • Guidelines regarding how certain business models fit under the current regulatory regime.
  • New licensing regimes at EU level, such as a ‘Fintech’ license, provided that the first two core principles are respected.
  • Regulating Fintech firms that provide services to regulated firms.
  • Introducing rules for supervisors (such as organising stakeholder forums and introducing basic principles for firm support).
  • EU support to improve interoperability and standardisation.

As regards financial stability, the Consultation seeks input in order to assess the financial soundness and resilience of non-Fintech firms and the impact of Fintech on such firms.

Regulation of data sharing and transparency

The Commission seeks to balance data sharing and transparency on one hand, and data protection and security on the other. Addressing this issue, the Commission inquires whether service users should be entitled to fair compensation when their data is processed by service providers for commercial purposes beyond their direct relationship.

Exploring data transparency options while addressing data security, the Commission asks whether (a) distributed ledger technology can be used for financial data sharing and (b) additional cybersecurity requirements for financial service providers must be introduced and which penetration and resilience testing rules should be implemented. Finally, the Commission also seeks to improve the access to finance for small and medium enterprises through data sharing.