The European Commission Expert Group on Regulatory Obstacles to Financial Innovation has published its long-awaited report on how to improve and strengthen the regional FinTech landscape and encourage greater investment and innovation, along with ending regulatory fragmentation and establishing a more robust regulatory framework.
Made up of industry experts, financial institutions, academics and lawyers, along with observers from bodies including the EBA, ESMA and the ECB, the Expert Group has been working since June 2018 on how to create an accommodative framework for FinTech within the EU. The report sets out 30 recommendations for legislative and non-legislative actions to address issues that are currently impairing the adoption or scaling up of FinTech across the EU. These include actions to facilitate the use of AI and associated technologies, DLT and crypto-assets, RegTech and SupTech. Action is also recommended to strengthen the framework for access to, sharing and processing of data.
“Overall, the recommendations are intended to support a more accommodative and technologically neutral framework for FinTech across the EU, enabling the benefits of FinTech to be leveraged whilst at the same time effectively mitigating risk,” explains Elisabeth Noble, Senior Policy Advisor with the EU Banking Authority and Member of the Expert Group.
The EU is currently home to just 5% of the global value of technology companies, compared to 65% in the US and 35% in China, and the group strongly criticised the current “absent, fragmented, or unclear regulatory framework” as preventing the EU financial markets from fully realising the benefits of technological advances. “Competitiveness and regulatory sovereignty in relation to technology-driven finance require a considerably more harmonised framework on the basis of existing regulatory axioms than currently exists in the EU,” urges the report.
Notably, the report suggests the creation of a “comprehensive and ambitious agenda” to support the adoption of advanced RegTech and SupTech (supervisory technology) by the financial sector, as well as the adoption of a strategy to make reporting and compliance processes both machine- and human-readable. It also recommends the establishment of regulatory clearing houses to centralise the dissemination of rules to regulated entities, receive incident information and regulatory reports, and collect market data, along with the creation of a new EU-wide ‘regulatory sandbox’ to support innovation and standardisation.
KYC processes should be fully harmonised across member states, says the group, while customer due diligence and client onboarding could also be regulated and legislation around digital identity verification introduced. A series of recommendations around data sharing and processing include the mandated use of standardised data-sharing interfaces.
From a regulatory perspective, the report emphasises that while EU financial services legislation should be “technologically neutral, sufficiently future-proof, and fit-for-purpose” there is little point in creating technology-specific frameworks (such as a ‘blockchain regulation’) and the issue should instead be addressed from a thematic perspective. Five suggested themes include understanding technology and its impact, cyber resilience, outsourcing, governance of distributed financial networks (including the legal framework for crypto-assets), and standardisation, RegTech and SupTech.
In the RegTech space, it is notable that between 2008-2016, there was a 500% increase in regulatory changes in developed markets, highlighting the need for scalable, reliable and efficient RegTech solutions. As firms seek to reduce compliance burdens and avoid regulatory fines research has found that over the next few years RegTech spend will grow by 48% per annum – rising from $10.6 billion in 2017 to $76.3 billion in 2022. And according to the expert group, “the current framework is inefficient,” particularly in the area of reporting requirements.
“A proactive approach towards providing clarity on regulatory and supervisory expectations on the use of FinTech in the financial sector can foster investment by providing much-desired certainty,” says Noble. “By creating these conditions that enable businesses to scale more readily cross-border, firms will be better placed to tap into the local market and potentially become not only EU, but also global, champions.”
The report recommends the introduction of machine-readable and executable legislation, including the standardisation of regulatory instructions in a machine executable version which can facilitate automated regulatory reporting. Automated and AI solutions for data input, aggregation and analysis should also be considered, including solutions enabling ‘straight through processing’ of regulatory returns. And the aforementioned regulatory clearing houses should work on linking regulation, compliance processes and reporting to encourage faster, more accurate and lower-cost regulatory reporting along with more effective regulation and supervision.
“The adoption of standards-based common RegTech and SupTech solutions would assist firms (e.g. in day-to-day regulatory reporting), supervisors (e.g. in analysing suspicious transaction reports, reported data and data-sharing cross-border), and the ESAs (e.g. in the context of the reporting of data for stress test exercises and the monitoring of macro prudential risks),” it concludes.
A long road ahead
Other recommendations include a common taxonomy, united regulatory approach and legislated conflict-of-laws rule for crypto assets; the monitoring of outsourcing by financial institutions of critical services in order to mitigate concentration risks; the development of a new cyber resilience testing framework for the financial sector; and guidance on standards for AI technology.
“None of our Recommendations are quick fixes,” warns chairman Philipp Paech. “Some may even be rather complex in terms of implementation. Still, we are convinced that the EU should not restrict its actions to the low hanging fruit, but should pursue an approach which seeks to ensure that it remains competitive in this area.”
The report is expected to play an important role in informing the European Commission’s upcoming Digital Finance Strategy.
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