Coronavirus and digital finance: public consultations and other initiatives

The current coronavirus pandemic made our financial lives exclusively digital. This raised new challenges but also opened new opportunities for the financial sector. It is of no surprise therefore that within the EU Commission's overall focal point on fighting the coronavirus health emergency and its social and economic consequences, digital finance gained a pivotal role. There are currently a couple of initiatives that we wished to share with you.

Public consultations 

A couple of days ago the Commission opened two important public consultations.

The first focuses more generally on setting out the new Digital Finance Strategy/FinTech Action Plan later in 2020 that would identify policy areas and policy measures for the next 5 years (on the current FinTech Action Plan we reported here). The consultation is organized around three priority areas:

1. ensuring that the EU financial services regulatory framework is fit for the digital age;
2. enabling consumers and firms to reap the opportunities offered by the EU-wide Single Market for digital financial services;
3. promoting a data-driven financial sector for the benefit of EU consumers and firms.

At the same time, the EU Commission opened a separate consultation on retail payments as a key step towards the adoption of a retail Payments Strategy for Europe.

Both consultations can be contributed to by the 26th of June 2020.

Online roundtables

Within its initiative of Digital Finance Outreach 2020 DG FISMA moved its planned roundtable events online. They are organized around current topical issues and are run weekly until the end of May. The events aim to raise awareness of the work of DG FISMA and to connect relevant stakeholders. They are free to attend and encourage contribution, so if you have anything to add, feel free to raise your hand.

Pan-European Hackaton

Finally, in collaboration with Member States the Commission opened a very interesting call for participation in a pan-European Hackaton, within the #EUvsVirus challenge, to develop innovative solutions for the new challenges raised by the current coronavirus crisis. One of the domains of the hackaton is digital finance with a range of challenges. One important challenge for us is how to develop innovative solutions to support the the most vulnerable, the digitally excluded such as the elderly, who currently struggle to access financial services and products. There is also a challenge to solve other problems in the current climate such as to development of coronavirus related health insurance (see the list of challenges here). The hackaton will be held 24-26 April. Registration is still open (access link here), so if you have ideas for workable solutions, please register. The full agenda is also available here and much of the event is livestreamed on Facebook. 

Recent research reveals how consumers engage with crypto-assets

The Financial Conduct Authority, the UK's financial regulator/supervisor recently published an interesting report on how consumers behave in relation to crypto-assets: How and why consumers buy cryptoassets. To remind ourselves, crypto-assets are virtual, digital assets used for payment or investment purposes or both. This research fits well into the current EU efforts on regulating fintech services and products. We have reported earlier on the EU Commission's 2018 Action Plan on Fintech within which crypto-assets are of a special concern. More recently we have discussed ESMA's recommendation for a need for tailored regulation for the protection of consumers, buyers of crypto-assets.

The present research is focused on consumer behavior, on how consumers engage with crypto-assets. It is especially interesting to discover the profile of an 'average' fintech customer of crypto-assets and their ability to make informed decisions. The report answers questions such as why did consumers decide to buy crypto-assets, what sources of information they used to make their decisions, and how well in general they understand the market. As expected, this research seems to suggest crypto-assets are bought for investment purposes without fully understanding the risks involved in their decisions. 

The report is an interesting and easy read with plenty of direct testimonies from consumers, and  as such is highly recommended to our readers interested in consumer behavior and/or financial innovation.

In the future, it would be interesting to expand this research onto other areas of fintech services i.e. credit, insurance and payments to get a fuller picture of the fintech market structures and their consumers.

ESMA recommends tailored regulation of crypto-assets to secure investor protection

Fulfilling its obligation from the FinTech Action Plan (on which we reported here), last week the European Securities and Markets Authority (ESMA) published a recommendation for EU law and policy-makers for closing the regulatory gap on crypto-assets.

Crypto-assets are a type of private asset that depends primarily on cryptography and Distributed Ledger Technology. There are a wide variety of crypto-asset, their number is currently estimated to be around 2000. They range from  crypto or virtual currencies like Bitcoin, to so-called digital tokens issued through Initial Coin Offerings (IPOs) that allow businesses to raise capital for their projects, by issuing digital tokens in exchange e.g. for crypto-currencies. Consumers thus may use these assets as investment or as a means of payment, or both if the asset has hybrid features.

Crypto-assets are relatively new and the market is evolving, and poses challenges for regulators and market participants. In cooperation with National Supervisory Authorities, ESMA revealed that the current regulatory framework including MiFID with the rules on investor protection is either difficult to apply to these assets (and how the regulatory framework is applied may be vary between between Member States) or that it cannot be applied at all.

From a consumer protection perspective, these are risky instruments where protection is especially needed. Consumers are likely to have insufficient understanding of the risks involved in the transaction, especially the value of the investment, for example, how the price of the asset is going to change and how likely it is that the underlying project for which the investment is made in case of IPOs is likely to be successful. And then there is also the problem of the reliability of trading platforms. While some of these risks are pertinent to other consumer transactions, they are exacerbated here due to the nature of the products (as being highly abstract, diverse and subject to fast innovation), and to the regulatory gap. The additional practical problem is that consumers may not easily distinguish between those assets that are within the rules are those that are outside the scope of the regulatory framework.

To overcome the current regulatory gap and to ensure a consistent approach, ESMA calls for a special regulatory regime tailored for crypto-assets, that would ensure adequate information disclosure and enable consumers to make informed decisions. While information rules would certainly be helpful, we must urge EU law and policy makers to also consider more intrusive forms of regulation such as product regulation should this prove necessary to provide effective protection for consumers. At least, national legislators/regulators should be empowered to impose limits on product design e.g. price cap. Is opting for more intrusive regulation (or at least a balanced approach between information and product regulation) a preferred regulatory route compared to a mixture of more relaxed information rules with an option of banning products from the market when things get out of control (on which see here)? What do you think?

Recent study reveals surprising facts about automated financial advice

In September 2018 the EU supervisory authorities (ESAs)published a Joint Committee Report on the results of the monitoring exercise on ‘automation in financial advice that revealed surprising facts about automated financial advice in the EU.

Following the publication of a Discussion Paper on Automation in Financial Advice in 2015 and a Report in 2016 (on which we reported here) the ESAs  published the present follow up report on the evolution of automation in financial advice in the securities, banking and insurance sectors over the past two years. The report is based a survey with competent national authorities.

Surprisingly, the report shows that while the phenomenon of automation in financial advice (or 'robo-advice') seems to be slowly growing, the overall number of firms and customers using automated financial advise is still quite limited. In addition, while some new trends seem to emerge (such as the use of Big Data, chatbots for customer service and extension to a broader range of products) there seems to have been no substantial change to the overall market since the publication of the ESA Report in 2016. The Report identifies:

• cultural/psychological barriers as one of the main causes of lack of engagement, that can be traced back to low level financial literacy, and a lack of consumer trust and confidence in using digital tools;
• regulatory barriers such as the complexity of the applicable legislation (MiFID II/MIFIR, IDD, GDPR, PRIIPs) that pose special challenges for small, startup FinTech firms.

It therefore seems that the market for automated financial advice has not taken up, and that its full potential is yet to be explored. Given the above identifies barriers, one may wonder whether the time is not ripe for a shift to greater digitization in the financial sector or whether the regulatory environment needs to change both in terms of giving greater room for small Fintech firms to expand on the market, and in terms of the existing consumer protection tools. 

New study on the distribution of retail investment products in the EU

Today the EU Commission reminded us on a study conducted by Deloitte Luxembourg on Distribution system of retail investment products across the EU published in April 2018. The study investigated how well EU retail investment markets work for consumers, covering 15 Member States. Unsurprisingly, the study concluded that although consumers have choice, they face significant challenges in collecting and processing information for making good investment choices (see the summary of findings here and the full study here).

European Blockchain Partnership: should consumer concerns be addressed?

On the 10th of April 22 Member States entered into the European Blockchain Partnership, pledging to cooperate and share technical and regulatory expertise and experience on the use of blockchain.

For many of us, it may be hard to understand what blockchain is. It is the best described as a database that stores and distributes information with the so called distributive ledger technology (see a very good paper by Bacon et al on Blockchain Demystified). In terms of its purpose, perhaps it is easier to think about blockchain as a technology akin to the internet. It operates differently, it is decentralized, and data integrity and reliability is said to be its the greatest advantages, but we as consumers, will probably use blockchain in a similar fashion like we use now the internet.

Blockchain is successfully used in the Fintech sector for example for the operation of cryptocurrency platforms like Bitcoin. As far as I now, currently there are not many direct applications where consumers would be able to make use of the blockchain technology. However, the new technology has huge potential, and according to the plans of the EU Commission, it will overtake almost all spheres of public and private lives. Blockchain is seen an integral part of the Digital Single Market.

The intersection of blockchain and consumer protection has not been greatly explored. As every innovation it can greatly benefit consumers. Blockchain is set to be particularly advantageous in terms of certainty and reliability that it provides for transactions, however, there may be hidden dangers and all sorts of new interesting legal questions that may not yet be apparent, such as those connected to the use of smart contracts. Traditional  grounds for consumer detriment such as information deficit may also appear in the new context, with new dimensions that regulators will need to consider.

The Commission's initiative to prompt EU-wide cooperation is welcomed. However, it should also make sure that consumer interests are in the forefront of the new initiatives. Do you see any particular aspects of consumer protection that should raise special concerns?

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.

Public consultation on FinTech: closes 15 June 2017

The EU Commission is currently holding a public consultation on FinTech (see here).

FinTech, standing for financial technologies, means the use of technology in the provision of financial service. The term is very broad, it includes the provision of traditional financial services with the use of technology by traditional service providers (e.g. online banking), or the provision of innovative products by innovative startups (e.g. peer-to-peer lending and bitcoin). Creating policy solutions for protecting FinTech customers is one of the current priorities under the Consumer financial services action plan that sees FinTech a major driver for strengthening the EU single market for financial services (see for more here).

The consultation  is structured around four broad areas to reflect main opportunities and challenges raised by FinTech:

1. Fostering access to financial services for consumers and businesses;
2. Bringing down operational costs and increasing efficiency for the industry;
3. Making the single market more competitive by lowering barriers to entry; and
4. Balancing greater data sharing and transparency with data security and protection needs.

Useful material for understanding the opportunities and challenge raised by FinTech is provided by a one day conference on FinTech hosted by the EU Commission. The material is available online, including a video of the conference (see it here).

Based on the results of this public consultation and the work of the FinTech Task Force (see our post here) the EU Commission will determine which actions are required to support the development of FinTech and a technology-driven single market for financial services.

The consultation is open until 15 June 2017, and awaits reposes from consumers and organizations. So if you have any personal experience with using FinTech products and services and or if you have relevant research results, please share them. As always, we will be waiting for the results of the public consultation to report on them to you.

Addressing financial innovation: the launch of a New Task Force on Financial Technology

Last week the Commission has launched a Task Force on Financial Technology focusing on the FinTech sector (see the press release here). FinTeach refers to new applications, processes, products or business models in the financial services industry such as peer-to-peer lending and crowdfunding. The new Task Force brings together the expertise of the Commission staff in several areas including competition and consumer protection, financial and digital services and digital innovation and security. It will assess the state of the sector in the EU and develop strategies for addressing the potential challenges that this sector poses, in line with the Commission's goal to develop a comprehensive strategy on FinTech. The work of this Task Force is potentially very important for protecting consumers of financial services, given that FinTech challenges the 'traditional' consumer protection rules, including for example the definitions of a consumer and a creditor. The task force will engage with stakeholders and present policy recommendations in the first half of 2017. We will be anxiously waiting for this report.