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More regulatory engagement with FinTech: a global assessment of FinTech credit, developing an EU FinTech and RegTech approach and a UK discussion of central banking applications

  • United Kingdom
  • Financial institutions - Digital Financial Services

30-05-2017

As FinTech continues to grow as a global phenomenon, regulators at all levels are trying to understand the regulatory impact of new developments. At the global level, the Committee on the Global Financial System (CGFS) and the Financial Stability Board (FSB) has published a report on the global rise of FinTech credit, at the European level the European Parliament is attempting to set up a FinTech regulatory framework whilst ESMA highlights the need to engage with RegTech solutions, whilst in the United Kingdom the Bank of England is opening an accelerator programme.

FinTech credit: a report by CGFS and the FSB

FinTech credit, defined as credit activity facilitated by electronic platforms, such as peer-to-peer lenders, is receiving significant interest in financial markets, and there is concern regarding how this will develop, for example in terms of the nature of credit provision and the traditional banking sector. The CGFS and FSB have analysed this issue in a report assessing the potential micro-financial benefits and risks of FinTech credit, and its possible implications for financial stability. The report notes significant variation in the nature of FinTech credit activity across and within countries, but that there is a general trend towards growth in this industry, even if it is comparatively small in size compared to traditional banking.

The report seeks to help regulators monitor credit activities, by providing an overview of the advantages and disadvantages incumbent in the new industry. The report recognises that FinTech credit platforms may lower transaction costs and entail convenience for end users, whilst increasing access to credit and investments for underserved segments of the population and business sectors, for example by providing alternative funding sources. They provide competition to banks, and may be resistant to bank specific problems. There are, however, risks, for example in terms of the financial performance of platforms using agency lending models being impacted through changes in investor confidence. Platforms may face greater financial risk stemming from greater credit risk appetite than traditional banking models, untested risk processes and relatively greater exposure to cyber-risks. Increasing competition in the credit market could generally lower lending standards for credit markets which are already deep, as wel as reduce banking profits which, in turn, are needed to pay for the provision of other banking services.

Please see here for the full report

Developing a European FinTech framework and understanding RegTech

The European Parliament is developing a principles-based framework to analyse financial innovation and its impact on markets and consumers. The framework is to cover the interrelationship between FinTech and data, cybersecurity and ICT risks, blockchain, interoperability, financial security and customer protection, and financial education and IT skills.

An important part of the new regulatory landscape will be the growth of RegTech. This is driven by firms needing to meet increasingly onerous regulatory requirements, a belief by regulators that a more granular approach to regulatory supervision leads to better outcomes for market participants and consumers, and because increasingly sophisticated technology means that the advantages of automated monitoring are becoming more apparent. This growth has been exacerbated by the regulatory response to the 2007 financial crisis, which has given impetus to an industry designed to ameliorate the impact of regulation.

In a speech by Patrick Armstrong, Senior Risk Officer of ESMA's Innovation and Products team, he explains that the proposed framework is guided by three core objectives: investor protection, financial stability and orderly markets. In relation to RegTech, ESMA's framework is to be both inwards looking, to see how new process could assist ESMA in performing an automated data-driven supervisory processes, and outwards looking, to facilitate and encourage the digitalisation of the entities with which ESMA interacts, as well as consistent digital formatting to enable big data analytics. ESMA also recognises that utilising RegTech is not without risk. In particular, firms should be aware that using a RegTech solution is not a way of absolving regulatory responsibility, that client data should be kept secure to the same extent as client money, and that they will need to be able to adapt platforms to cope with newer digitalised infrastructures.

Patrick Armstrong' speech can be accessed here, and the European Parliament provisional FinTech framework can be accessed here.

The Bank of England accelerator for central banking proofs of concept

To help the Bank of England function more efficiently and effectively when maintain monetary and financial stability, it has opened an accelerator programme. This provides firms with an opportunity to apply their technology to ‘real issues’ and work directly with leading experts to obtain iterative feedback on the applicability and usefulness of their tools and products to the Bank’s needs. A list of selected firms will be publicly available, and firms which complete proofs of concept are invited to join the Bank's FinTech Community. Further information on the application process for the Bank of England accelerator can be found here.

The importance of a holistic approach

FinTech is currently under constant regulatory scrutiny, at each of the domestic, continental and global levels. Regulators are focussed on developing proportionate and appropriate means to deal with and understand FinTech, and developments at each level are influencing their attitude and response to new developments. The Eversheds Sutherlands Digital Financial Services team takes a holistic approach to these developments, looking to the underlying purpose of regulation to fully appreciate the intention of the regulators and assist firms to best position themselves to take advantage of the new regulatory landscape. Please do contact us if you wish to find out more.

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