The European Commission’s FinTech Action Plan and Proposed Regulation on Crowdfunding

By Jonathan Cardenas

On 8 March 2018, the European Commission (“Commission”) introduced its FinTech Action Plan, a policy proposal designed to augment the international competitiveness of the European Single Market in the financial services sector.[1]  Together with the FinTech Action Plan, the Commission introduced a proposal for a regulation on European crowdfunding services providers (“Proposed Regulation on Crowdfunding”).[2]  Both of these proposals form part of a broader package of measures designed to deepen and complete the European Capital Markets Union by 2019.[3]  This article briefly summarizes both the FinTech Action Plan and the Proposed Regulation on Crowdfunding.

 

  1. FinTech Action Plan

With the goal of turning the European Union (“EU”) into a “global hub for FinTech,”[4] the FinTech Action Plan introduces measures that build upon several of the Commission’s prior initiatives, including the regulatory modernization objectives set forth by the Commission’s internal Task Force on Financial Technology,[5] the capital market integration objectives identified in the Commission’s Capital Markets Union Action Plan,[6] and the digital market integration objectives identified in the Commission’s Digital Single Market Strategy.[7]  Responding to calls from the European Parliament[8] and European Council[9] for a proportional, future-oriented regulatory framework that balances competition and innovation while preserving financial stability and investor protection, and also drawing upon the conclusions of the March–June 2017 Public Consultation on FinTech,[10] the FinTech Action Plan consists of a “targeted,”[11] three-pronged strategy, that sets out 19 steps[12] to enable the EU economy to cautiously embrace the digital transformation of the financial services sector.

  • “Enabling Innovative Business Models to Reach EU Scale”

The first prong of the FinTech Action Plan is focused on measures that will enable EU-based FinTech companies to access and scale across the entire Single Market.

Recognizing the need for regulatory harmonization, the Commission calls for uniformity in financial service provider licensing requirements across the EU to avoid conflicting national rules that hamper the development of a single European market in emerging financial services, such as crowdfunding (Step 1).  With crowdfunding specifically in mind, the Commission has proposed a regulation on European crowdfunding service providers (“ECSPs”), which, as discussed in further detail below, would create a pan-European passport regime for ECSPs that want to operate and scale across EU Member State borders.  In addition, the Commission invites the European Supervisory Authorities (“ESAs”) to outline differences in FinTech licensing requirements across the EU, particularly with regard to how Member State regulatory authorities apply EU proportionality and flexibility principles in the context of national financial services legislation (Step 2).  The Commission encourages the ESAs to present Member State financial regulators with recommendations as to how national rules can converge.  The Commission also encourages the ESAs to present the Commission with recommendations as to whether there is a need for EU-level financial services legislation in this context.  Moreover, the Commission will continue to monitor developments in the cryptocurrency asset and initial coin offering (“ICO”) space in conjunction with the ESAs, the European Central Bank, the Financial Stability Board and other international standard setters in order to determine whether EU-level regulatory measures are needed (Step 3).

Recognizing the importance of common standards for the development of an EU-wide FinTech market, the Commission is focused on developing standards that will enhance interoperability between FinTech market player systems.  The Commission plans to work with the European Committee for Standardization and the International Organization for Standardization to develop coordinated approaches on FinTech standards by Q4 2018, particularly in relation to blockchain technology (Step 4).  In addition, the Commission will support industry-led efforts to develop global standards for application programming interfaces by mid-2019 that are compliant with the EU Payment Services Directive and EU General Data Protection Regulation (Step 5).

In order to facilitate the emergence of FinTech companies across the EU, the Commission encourages the development of innovation hubs (institutional arrangements in which market players engage with regulators to share information on market developments and regulatory requirements)[13] and regulatory sandboxes (controlled spaces in which financial institutions and non-financial firms can test new FinTech concepts with the support of a government authority for a limited period of time),[14] collectively referred to by the Commission as “FinTech facilitators.”[15]  The Commission specifically encourages the ESAs to identify best practices for innovation hubs and regulatory sandboxes by Q4 2018 (Step 6).  The Commission invites the ESAs and Member States to take initiatives to facilitate innovation based on these best practices, and in particular, to promote the establishment of innovation hubs in all Member States (Step 7).  Based upon the work of the ESAs, the Commission will present a report with best practices for regulatory sandboxes by Q1 2019 (Step 8).

  • “Supporting the Uptake of Technological Innovation in the Financial Sector”

The second prong of the FinTech Action Plan is focused on measures that will facilitate the adoption of FinTech across the EU financial services industry.

The Commission begins the second prong by indicating that its policy approach to FinTech is guided by the principle of “technology neutrality,” an EU regulatory principle that requires national regulators to ensure that national regulation “neither imposes nor discriminates in favour of the use of a particular type of technology.”[16]  In this regard, the Commission plans to setup an expert group to assess, by Q2 2019, the extent to which the current EU regulatory framework for financial services is neutral toward artificial intelligence and distributed ledger technology, particularly in relation to jurisdictional questions surrounding blockchain-based applications, the validity and enforceability of smart contracts, and the legal status of ICOs (Step 9).

In addition to ensuring that EU financial regulation is fit for artificial intelligence and blockchain, the Commission also intends to remove obstacles that limit the use of cloud computing services across the EU financial services industry.  In this regard, the Commission invites the ESAs to produce, by Q1 2019, formal guidelines that clarify the expectations of financial supervisory authorities with respect to the outsourcing of data by financial institutions to cloud service providers (Step 10).  The Commission also invites cloud service providers, cloud services users and regulatory authorities to collaboratively develop self-regulatory codes of conduct that will eliminate data localization restrictions, and in turn, enable financial institutions to port their data and applications when switching between cloud services providers (Step 11).  In addition, the Commission will facilitate the development of standard contractual clauses for cloud outsourcing by financial institutions, particularly with regard to audit and reporting requirements (Step 12).

Recognizing that blockchain and distributed ledger technology will “likely lead to a major breakthrough that will transform the way information or assets are exchanged,”[17] the Commission plans to hold additional public consultations in Q2 2018 on the possible implementation of the European Financial Transparency Gateway, a pilot project that uses distributed ledger technology to record information about companies listed on EU securities markets (Step 13).  In addition, the Commission plans to continue to develop a comprehensive, cross-sector strategy toward blockchain and distributed ledger technology that enables the introduction of FinTech and RegTech applications across the EU (Step 14).  In conjunction with both the EU Blockchain Observatory and Forum, and the European Standardization Organizations, the Commission will continue to support interoperability and standardization efforts, and will continue to evaluate blockchain applications in the context of the Commission’s Next Generation Internet Initiative (Step 15).

Recognizing that regulatory uncertainty and fragmentation prevents the European financial services industry from taking up new technology, the Commission will also establish an EU FinTech Lab in Q2 2018 to enable EU and national regulators to engage in regulatory discussions and training sessions with select technology providers in a neutral, non-commercial space (Step 16).

  • “Enhancing Security and Integrity of the Financial Sector”

The third prong of the FinTech Action Plan is focused on financial services industry cybersecurity.

Recognizing the cross-border nature of cybersecurity threats and the need to make the EU financial services industry cyberattack resilient, the Commission will organize a public-private workshop in Q2 2018 to examine regulatory obstacles that limit cyber threat information sharing between financial market participants, and to identify potential solutions to these obstacles (Step 17).  The Commission also invites the ESAs to map, by Q1 2019, existing supervisory practices related to financial services sector cybersecurity, to consider issuing guidelines geared toward supervisory convergence in cybersecurity risk management, and if necessary, to provide the Commission with technical advice on the need for EU regulatory reform (Step 18).  The Commission also invites the ESAs to evaluate, by Q4 2018, the costs and benefits of developing an EU-coordinated cyber resilience testing framework for the entire EU financial sector (Step 19).

 

  1. Proposed Regulation on Crowdfunding

In line with the Commission’s Capital Markets Union objective of broadening access to finance for start-up companies,[18] the Proposed Regulation on Crowdfunding is aimed at facilitating crowdfunding activity across the Single Market.  The proposed regulation plans to enable investment-based and lending-based ECSPs to scale across Member State borders by creating a pan-European crowdfunding passport regime under which qualifying ECSPs can provide crowdfunding services across the EU without the need to obtain individual authorization from each Member State.  The proposed regulation also seeks to minimize investor risk exposure by setting forth organizational and operational requirements, which include, among others, prudent risk management and adequate information disclosure.

[1] COM (2018) 109/2 – FinTech Action plan: For a more competitive and innovative European financial sector. Available at: https://ec.europa.eu/info/sites/info/files/180308-action-plan-fintech_en.pdf.

[2] COM (2018) 113 – Proposal for a regulation on European Crowdfunding Service Providers (ECSP) for Business. Available at: https://ec.europa.eu/info/law/better-regulation/initiative/181605/attachment/090166e5b9160b13_en.

[3] COM (2018) 114 final – Completing the Capital Markets Union by 2019 – time to accelerate delivery. Available at: http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52018DC0114&from=EN.

[4] European Commission Press Release, “FinTech: Commission Takes Action For a More Competitive and Innovative Financial Market,” 8 March 2018. Available at: https://ec.europa.eu/info/sites/info/files/180308-action-plan-fintech_en.pdf.

[5] European Commission Banking and Finance Newsletter, Task Force on Financial Technology, 28 March 2017. Available at: http://ec.europa.eu/newsroom/fisma/item-detail.cfm?item_id=56443&utm_source=fisma_newsroom&utm_medium=Website&utm_campaign=fisma&utm_content=Task%20Force%20on%20Financial%20Technology&lang=en.  See also European Commission Announcement, Vice President’s speech at the conference #FINTECHEU “Is EU regulation fit for new financial technologies?,” 23 March 2017.  Available at: https://ec.europa.eu/commission/commissioners/2014-2019/dombrovskis/announcements/vice-presidents-speech-conference-fintecheu-eu-regulation-fit-new-financial-technologies_en.  See also European Commission Blog Post, “European Commission sets up an internal Task Force on Financial Technology,” 14 November 2016.  Available at: https://ec.europa.eu/digital-single-market/en/blog/european-commission-sets-internal-task-force-financial-technology.

[6] COM/2015/0468 final – Action Plan on Building a Capital Markets Union.  Available at : http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015DC0468&from=EN.

[7] COM(2015) 192 final – A Digital Single Market Strategy for Europe, 6 May 2015.  Available at: http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52015DC0192&from=EN.  See also COM (2017) 228 final – Mid-Term review on the implementation of the Digital Single Market Strategy: A Connected Digital Single Market for All, 10 May 2017.  Available at: http://eur-lex.europa.eu/resource.html?uri=cellar:a4215207-362b-11e7-a08e-01aa75ed71a1.0001.02/DOC_1&format=PDF.

[8] European Parliament Committee on Economic and Monetary Affairs, Report on FinTech: the influence of technology on the future of the financial sector, Rapporteur: Cora van Nieuwenhuizen, 2016/2243(INI), 28 April 2017.  Available at: http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+REPORT+A8-2017-0176+0+DOC+PDF+V0//EN.

[9] EUCO 14/17, CO EUR 17, CONCL 5, European Council Meeting Conclusions, 19 October 2017. Available at:  http://www.consilium.europa.eu/media/21620/19-euco-final-conclusions-en.pdf.

[10] European Commission Directorate-General for Financial Stability, Financial Services and Capital Markets Union, “Summary of contributions to the ‘Public Consultation on FinTech: a more competitive and innovative European financial sector,’” 2017.  Available at: https://ec.europa.eu/info/sites/info/files/2017-fintech-summary-of-responses_en.pdf.

[11] FinTech Action Plan.

[12] European Commission Press Release, “FinTech: Commission Takes Action For a More Competitive and Innovative Financial Market,” 8 March 2018. Available at: https://ec.europa.eu/info/sites/info/files/180308-action-plan-fintech_en.pdf.

[13] EBA/DP/2017/02 – Discussion Paper on the EBA’s approach to financial technology (FinTech), 4 August 2017. Available at: https://www.eba.europa.eu/documents/10180/1919160/EBA+Discussion+Paper+on+Fintech+%28EBA-DP-2017-02%29.pdf.

[14] Id.

[15] FinTech Action Plan, p. 8.

[16] Directive 2002/21 on a common regulatory framework for electronic communications networks and services (Framework Directive) [2002] OJ L108/33.  Available at: https://eur-lex.europa.eu/legal-content/en/ALL/?uri=CELEX%3A32002L0021.

[17] FinTech Action Plan, p. 12.

[18] Capital Markets Union Action Plan.

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