Tuesday, 17 April 2018

Addressing financial innovation: the Action Plan on FinTech

On 8 March 2018 the EU Commission adopted the FinTech Action Plan: for a more competitive and innovative European financial sector, following a Public consultation (on which we reported here). The Action Plan aims towards a future-proof regulatory framework by creating favourable regulatory environment for the flourishing of FinTech services and products throughout the EU.  This initiative fits well with parallel efforts to create the Digital Single Market and the Capital Markets Union.

Although the use of technology in the provision of financial services and creation of financial products is ever increasing, the existing (large) discrepancies between Member States in the regulatory framework under which FinTech firms operate had not been ameliorated. Some Member States like the UK have adopted tailored approach to some, arguably most common, FinTech services and products (such as peer-to-peer lending and crowdfunding) and created a 'Regulatory Sandbox' to subject selected FinTech firms to the existing regulatory environment. The majority of Member States however does not have special  rules and regulatory/supervisory approach to these firms and their products and services are being subject to general rules designed for  'traditional' services and products. The discrepancies in regulatory approaches (from setting up a FinTech firm to offering products and services and supervising their operations) is an obstacle for the development of Single Market in this sector.

In the Action Plan the EU Commission addressed the above regulatory discrepancies in various ways. Most importantly, the Commission invites the European Supervisory Authorities to map the current authorising and licensing approaches applicable for FinTech firms in contemplation of creating a European Passporting Regime for these firms (by analogy to the regime currently applicable to bank). It also aims to review the suitability of the existing regulatory framework, including setting up an expert group to identify regulatory obstacles for FinTech (call for applications is open). Finally, the Commission will set up an EU FinTech Law where European and national authorities will receive training and education on technology enabled solutions.

While there is no doubt FinTech services and products may be hugely beneficial for consumers, making their transactions easier and enabling access to personalization of products and services (see some benefits here), FinTech carries a great deal of risk ranging from cybersecurity and data protection risks to the potential of unsuitable transactional decisions and the placement of dangerous products on the market. Although the Acton Plan does intent to facilitate a high level of consumer protection, it does not take into account the nature of consumer markets as such. As most European instruments, this initiative is heavily focused on raising the competitiveness of the EU and in providing choice for consumers. A systematic approach to consumer protection is absent. From a consumer protection point of view, the approach of the Action Plan is partial, addressing for example, the problems of informed decisions on retail investors,  and a danger from creating and marketing harmful products in some forms of speculative investments (crypto-assets).

Nevertheless, the initiative should be welcomed. Technology enabled services and products are a reality that should be addressed sooner rather than later. However, in reviewing the exiting EU regulatory framework and in creating and EU regulatory/supervisory approach, it is imperative to keep consumer interests and the true protection of consumers at the forefront of the initiatives. To this effect, perhaps it is time to conceptualize what is meant by a 'high level of consumer protection' and to follow it up systematically in addressing the protection of consumers on EU markets, including EU financial markets.

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