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Payments & FinTech Lawyer

European Commission’s Mid-Term Review of CMU Action Plan includes consideration of framework for FinTech firms

The European Commission (‘EC’) published on 8 June 2017 its Mid-Term Review of the Capital Markets Union Action Plan (‘Review’), which contains a specific priority action to ‘assess the case for an EU licensing and passporting framework for FinTech activities in Q4 2017.’

The Review reports on the EC’s plans for an EU Capital Markets Union (‘CMU’), which the EC describes as an initiative to enable a “true single market for capital.” Under a section entitled ‘Harnessing the potential of FinTech,’ the EC identifies that innovative businesses argue “that they are subject to disproportionate or inconsistent practices in the application of regulatory requirements” between EU Member States; therefore the EC is considering whether new licensing agreements for FinTech firms and further support in terms of passporting are needed. “From our experience in working with traditional and non-traditional financial services providers concerning cross-border scenarios, we have found that the practical application of the regulatory regime can be very different depending on the EU Member State and the authorities involved,” said Dr Andreas Zahradnik, Partner at Dorda. “This leads to legal and practical uncertainties, which in turn can place substantial financial strain in particular on those market participants that are still struggling to build up a business.”

However, reaction to a possible new licensing and passporting framework appears muted. “There is no evidence of an overwhelming desire for EU level regulation and passporting,” said Simon Warburton, Principal Associate at Mills & Reeve LLP. “To me, the key concern is creating a level playing field with the traditional financial institutions. I agree with those that worry it may be too early for such regimes to be implemented in what are often very new product markets.” Dr Zahradnik adds that “it is doubtful whether a new passporting regime tailor-made for FinTech startups is the way to tackle the issue as the regulatory jungle is already pretty dense.”

In the Review the EC also describes its work in understanding the role FinTech can play in EU capital markets, and acknowledges Member States’ work in supporting FinTech businesses, for instance through the setting up of regulatory ‘sandboxes.’ “Sandboxes with light touch regulation have unsurprisingly been promoted by many but there is little consensus at this stage on exactly what approach is best or at what pace it should be rolled out,” said Warburton. “In my view a hastily implemented licensing regime is likely to stifle competition and the resulting innovation on which FinTech thrives.”

In considering appropriate support for FinTech firms, the EC is drawing upon its ongoing consultation on its policy approach towards technological innovation in financial services (‘Consultation’), published on 23 March 2017, and notes that the results of the Consultation will provide input on whether new licensing arrangements are appropriate and on how best to support the FinTech sector.

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