FinTech – technology-enabled innovation in financial services – has developed significantly over recent years and is impacting the way financial services are produced and delivered. In fact, the financial sector is already by far the biggest spender in information and communication technologies (ICT). Therefore, it was only a matter of time for the European Commission to react with proposals to foster innovation and address potential risks in this heavily regulated sector. Today, the Commission presented its “FinTech Action Plan”, in which it outlines Europe’s regulatory vision for the future of FinTech, where technologies such as artificial intelligence, blockchain and cloud computing are pushing regulators to re-define the way they oversee the sector.
Bringing together officials from both its financial services and digital policy departments, the European Commission FinTech Taskforce, came to the conclusion that most of the existing challenges are about improving supervision. This is particularly true for cloud computing, which is widely considered by the industry as a way to reduce cost, increase efficiency and user-friendliness – and enable FinTech startups to scale up more easily. Whilst outsourcing has long existed in the financial services industry, the cloud presents a new set of challenges which current oversight practices, such as on-ground inspections, fail to appropriately address. Providers and users need legal clarity, cost-efficient surveillance mechanisms, and a convergence in oversight practices across Europe.
The Commission, however, wants to refrain from any legislative changes in financial regulation, and relies on European Supervisory Authorities, themselves composed of national surveillance authorities, to produce guidelines in 2019 on how to appropriately incorporate cloud computing in their supervisory practices. An industry-led Code of Conduct group would, in parallel, be tasked to develop standard contractual clauses on outsourcing, and develop guidelines on data portability to increase transparency and predictability, in line with the existing framework of the GDPR and the upcoming Free Flow of Data regulation.
The digital transformation of the financial sector triggers wider challenges, such as cybersecurity. After extensive consultations, a “cyber threat testing framework for significant market participants and infrastructures” could be considered in 2019 by European Supervisory Authorities. They are also asked to assess the need for guidelines on ICT security and governance requirements, and even legislative changes at EU level.
The approach gets more cautious in addressing the latest technology developments such as Blockchain. Based on the distributed ledger technology (DLT), Blockchain is already triggering the emergence of decentralized financial firms, and in the longer term has the potential to fundamentally change the way the sector is structured, with an increasingly irrelevant role for intermediaries such as banks. An “expert group” is expected to work more closely on the issue and publish results by Q2 2019.
All in all with this Action Plan, the European Commission hopes to kick-start an intensive period of reflection and assessment of the current oversight practices, whilst EU legislators will be tasked to rapidly pass through an EU-wide regulation of crowdfunding services – the sole legislative piece clearly foreseen in the Plan. In the financial sector more than in others, technology has the potential to outpace regulation and both financial institutions and technology providers are hoping for a swift update of the regulatory framework in Europe, nimble enough to be fit for the future. With this Action Plan, the EU is doing a step in the right direction – but the bulk of efforts are ahead of us in order to secure Europe’s position in the future financial regulatory landscape. The EU’s aim should be to deliver a masterpiece – to become the host of global FinTech.
At APCO, we’ve been discussing Blockchain as part of our APCO Blockchain Talks with experts from the policy and business ecosystems focusing on financial services, healthcare, energy, and identity. We will continue to take part in efforts to raise awareness on these emerging technologies that have the potential to transfigure the financial industry – and beyond. Join us!