In today’s environment, conventional business models and players are relegated to the background. Industry modernization is transforming the entire financial sector, forcing the launch of innovative products and changing current regulatory regimes. Companies that seek using the technologies in the field of finance for their own development should improve the efficiency of customer service with simultaneous reduction of costs and improved access to their services.
Given that the sector is closely linked to high risks and costs, new businesses in the FinTech industry must take into account additional important aspects such as cybersecurity, personal data protection and privacy, and the war on money laundering.
Let us consider in detail how such companies are regulated in the EU in 2020, and what changes have been made to the legal framework.
Regulatory Initiatives and Regulators in Europe
European governments are continuously trying to stimulate innovation in this sector in several jurisdictions. Let’s consider a complete list of European regulators in the Fintech field by EU states:
- FCA in the UK;
- ACPR and AMF in France;
- CSSF in Luxembourg;
- BaFin in Germany;
- AFM and DNB in the Netherlands;
- ESMA – European Securities and Markets Authority;
- European Commission.
It is the European Securities and Markets Authority (ESMA) that is responsible for launching new initiatives to attract investment to the financial sector of the countries. Currently, the European Commission is pro-actively studying industry innovation as part of its core business and is building grand plans to improve consumer financial services.
It has already been concluded that harmonization is necessary in most jurisdictions. We are talking about the development of regulatory acts and amendments to the current regulatory framework for the provision of such services, prevention of crimes in this field, and protection of retail customers, including consumers of blockchain services, transactions with securities, international currency transfers and lending at the EU level.
EU Leadership in Financial Technology
The European Securities and Markets Authority is developing revolutionary market regulation mechanisms to improve the efficiency of companies, compensating for potential risks. All resources are allocated to the most significant actors that address threats to the stability of FinTech in the EU.
Registration of a FinTech company in the European area implies full compliance with the following criteria:
- Careful planning of business establishing and development;
- Risk assessment, including consumer risks;
- Development and implementation of surveillance programs;
- Continuous monitoring and evaluation of innovative payment companies’ activities in the European Union.
The ESMA supervisory and regulatory body has initiated a new document that significantly improves the accountability and transparency of such companies. According to the regulatory act, all EU financial market players are obliged to resolve the existing issues related to the efficiency of their business and retail services.
Given that FinTech covers a significant range of products and services, the industry must intersect with innovative technologies, including robotic investment programs, automated currency exchange and online payments, as well as AI (Artificial Intelligence). In addition, modern EU payment companies should expand the range of their presence in the market, i.e. conduct analytics, work with the blockchain, crypto currencies, etc.
Main Changes in Regulation of the EU FinTech Sector in 2020
This year, the supervisory body of the European Securities and Markets Authority evaluated the work of more than two hundred trading platforms, and then developed two basic guidelines. MiFID II and MiFIR documents have requirements to transparency and set the limits for such companies, as well as the methods of outsourcing to CSP business (content protection policy).
The main purpose of these ESMA guides is to help EU enterprises analyze and identify problems and risks in outsourcing cloud services.
Requirements for the establishing of AIF alternative investment funds have also been updated. So, when registering such entities within the European Union, one must be guided by the new document, MiFID II, which came to replace the previous guidelines under the same name.
If it is necessary to open a payment organization, foreign investors and businessmen must meet the basic conditions for obtaining a European license. Namely:
- Disclose information about attracted funds;
- Specify data on the size of capital;
- Indicate the risks and liquidity of the company;
- Determine the activity level;
- Meet the minimum capital and prudential consolidation requirements;
- Evaluate the activities of key employees whose operational activities directly affect client risks and management of the business per se.
ESMA also developed a new regulatory framework for foreign investment companies. Innovative payment services are now guided by the RTS regulations for the SCA, as well as two EBO documents that facilitate the implementation of the new legal framework.
Regulation of the EU Crypto Assets Market in 2020
ESMA and EBA have developed documents on current and future regulation of the digital asset market, most of which qualify exclusively as financial instruments in the MiFID II Directive. But the authorities of most EU countries are continuously facing the need to correctly interpret the crypto currency in order to prevent such assets from going beyond legal regulation.
The EBA is currently working in the following direction. The MiFID II, e-money and PSD II Directives should address all the issues faced by crypto service providers, including trading platforms.
As for the adopted programs and regulations at the stage of development, the following changes are expected to be made for the FinTech companies working with crypto assets:
- Extension of the existing anti-money laundering directive for virtual e-currency exchanges and wallet suppliers;
- Taking additional measures in the financial sector with regard to cyber security, blockchain, financial stability and systems compatibility;
- Implementation of an action plan to promote innovative business models with the adoption of new technologies in the form of artificial intelligence and cloud service;
- Developing guidance on the integrity of financial systems within the EU and improving investor protection;
- Normative certainty of crypto assets with a certain breakdown into categories, which will create flexible conditions for managing the FinTech companies.
The Securities and Markets Authority states that businesses in the financial sector should be able to test their own innovative models, products and services without excessive bureaucratic procedures. In order to help crowdfunding platforms, the EU has developed a single set of rules for all the countries where all crowdfunding companies of any jurisdiction with the European membership operate.
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