The European Banking Authority (EBA) is fully immersed in analyzing regulation of financial technology – better known as fintech. In the spring of 2017, the EBA began its first attempt to create a map of fintech and its regulation. The results were published in this document. The EBA found that there are more than 1,500 fintech companies in the European Union. They have detailed information about 282 of these, and 31% are not subject to any sort of regulation.
The EBA predicts that investments in fintech will increase in the coming years, as regulatory changes in the EU are expected to facilitate the sector´s development. Some of these changes include the payment directive PSD2 and the introduction of policies for regulatory sandboxes in several countries.
That’s why the EBA created this map of the fintech ecosystem in the EU. The EBA concludes that these companies’ regulatory situation is very diverse. For example, 18% are payment institutions that are regulated by the current payment directive, PSD, and 11% are investment companies under the MiFID (Markets in Financial Instruments Directive). However, 31% are not subject to any EU or national regulations and 14% are only subject to national legislation.
Specifically, of the 31% of fintech companies that are not subject to regulation, the EBA estimates that 33% provide payment services, 20% credit, deposits and raising capital, while 11% provide investment services or investment management.
In order to avoid the risks this lack of regulation could pose to consumers, the EBA identified six priorities for action:
(i) authorization and sandbox regimes
ii) prudential and operational risks for credit institutions, electronic money institutions and payment institutions
(iii) the impact of fintech on these institutions’ business models
(iv) consumer protection
(v) the impact of fintech on the resolution of financial companies
(vi) the fintech companies’ performance in the fight against money laundering and financing of terrorism
A secure regulatory environment can be a factor in fostering a competitive fintech sector in Europe, which is one of the EU’s priorities, as was recently reported by Reuters. The European Commission is currently developing and introducing two regulations that greatly impact financial technology: the PSD2 directive, which regulates the payment sector; and consumer data protection through GPDR (General Data Protection Regulation), which enters into force in May 2018.
But fintech regulation is not exclusively a European concern – not in the least. Countries like Mexico, where the fintech sector is booming, are developing their own draft fintech bill. This legislation will be presented to the Mexican congress in September. According to data from July 2017 published by Mexico Fintech Radar, 80 new fintech startups were registered in the country in the past 10 months, putting it in forefront of the sector in Latin America.
Implications for the financial sector
Meanwhile, the Basel Committee on Banking Supervision published a consultative document in which it underscores the implications of fintech on the financial sector and offers ten recommendations to help both banks and supervisors address some of the challenges they face.
Specifically, the Committee recommends that banks: adopt balanced approaches when innovating; take the security and soundness of the banking system into account; monitor the existence of effective government structures and appropriate risk and IT management processes; cooperate with regulatory bodies to create standards for the services offered by both traditional actors and the digital companies. The recommendations also stress the importance of collaboration between banks and regulators, as well as among authorities and regulators from different sectors.
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