A European Commission (EC) expert group is calling on regulators to respond to developments in FinTech to ensure customers are benefitting from the changing nature of financial services.

The EC’s Expert Group on Regulatory Obstacles to Financial Innovation - which comprises the likes of BBVA, AXA, Barclays, ING, the University of Ireland and the London School of Economics - was setup last June to come up with recommendations on how to create an accommodative framework for technology-enabled provision of financial services.

According to its report, the four key areas identified are:

• The need to respond to new and changed risks caused by the use of innovative technologies such as artificial intelligence (AI) and distributed ledger technology (DLT).

• The need to remove fragmentation across the EU and ensure a level playing field between different participants in the financial services sector as they leverage new technologies.

• The necessity to reconcile data protection with the opportunities offered by FinTech.

• The need to consider the potential impacts of FinTech on consumers, from the perspective of financial inclusion and the ethical use of data.

Philipp Paech, associate professor of Financial Law at the London School of Economics and chairman of the Expert Group, pointed out that much of what is called ‘FinTech’ is already covered by EU law, albeit not very consistently.

“Apart from necessary clarifications and harmonisation of the existing rules, there are only few entirely new risks to consider,” he commented. “The most significant challenge is the entry of BigTechs such as Google and Amazon into the financial market, and closely connected to the former, the implementation of the data economy in financial services.

“The EU needs common answers to these questions, to foster an environment to support the scaling up of FinTech across the EU and home-grown global champions and to remain amongst the global standard setters in finance.”

Outlining their reasoning, group members, which include BBVA’s global head of data strategy Alvaro Martín, said the recommendations were a “call to action” for policy makers.

They added these changes were needed to ensure that the potential of FinTech to deliver greater choice and improved efficiencies in the provision of financial products and services was properly supported, and that regulation and supervision remained fit for purpose in the digital age.

Among the group's 30 recommendations, it highlighted the importance of the following measures:

• The explainability and interpretability of technology, especially artificial intelligence (AI), as measures to protect consumers and businesses and facilitate supervision, or to meet supervisory expectations.

• The creation of a regulatory framework built on the principle that activities that create the same risks should be governed by the same rules, with a view to ensuring adequate regulation and supervision and maintaining a level playing field.

• The ending of regulatory fragmentation, especially in the area of customer due diligence/Know Your Customer, as an important step towards creating a level playing field.

• Preventing unfair treatment of competing downstream services by large, vertically integrated platforms, in order to strengthen innovation and maintain consumer choices.

• The strengthening of the framework for access to, processing and sharing of data, in order to promote innovation and competition and establish a level playing field amongst actors.

In particular, the group identified several areas where industry is being held back in its capacity to leverage available technology by the absence of clear regulation - in particular, in the area of crypto assets - and also noted that markets may establish practices which are difficult to change subsequently - like around the use of data - pointing to the need for bold thought leadership and policy action.

The report explained that many of the potential risks emerging as a consequence of the use of FinTech are no different from the risks caused by the provision of financial services using more traditional means – indeed, the group was mindful of the fact that it was not possible to draw a clear line between ‘traditional’ and ‘innovative’ finance.

However, the use of FinTech may also create entirely new risks, for instance, where decisions are taken, or functions are performed by AI-powered ‘black box’ algorithms without human intervention or which are not comprehensible to customers or supervisors; and in terms of distributed record keeping or transaction processing that blurs regulatory and legal responsibilities that were traditionally based on bilateral principal-agent relationships.

The report pointed out that as things currently stand, tech benefits cannot be realised fully by European market participants. “This is, to a significant extent, due to an absent, fragmented or unclear regulatory framework… our group agrees that harmonising and clarifying regulatory and supervisory measures will provide an effective tool to support the scaling up of FinTech across the EU.”

The group concluded by stating that none of its recommendations are quick fixes, indeed 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, offering choices to consumers and businesses while at the same time appropriately mitigating associated risks,” added Paech.

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