ESMA published a report examining the status of licensing of fintech firms across EU. The report is based on two surveys conducted by ESMA since January 2018. The surveys gathered evidence from national competent authorities on the licensing regimes of fintech firms in their jurisdictions. Based on the evidence gathered, ESMA concludes that most innovative business models can operate within the existing EU rules and, therefore, it does not make additional recommendations for changes in EU regulation at this stage, in line with the EBA and EIOPA conclusions in their respective reports.
The first survey, which was conducted in January 2018, sought to identify potential gaps and issues in the existing EU regulatory framework, assess how the existing national regimes diverge, and propose recommendations to adapt EU legislation to the emerging innovations. The second survey, which was launched in January 2019, attempted to identify the ways in which the national competent authorities employed the concepts of proportionality and flexibility when licensing fintech firms. The surveys confirmed that national competent authorities do not typically distinguish between fintech and traditional business models in their authorization and licensing activities since they authorize a financial activity and not a technology. The following are the key findings from the surveys:
- The primary area where regulatory gaps and issues have been identified by national competent authorities and where fintech firms do not fit neatly within the existing rules is related to crypto-assets, initial coin offerings, and distributed ledger technology. National authorities called for more clarity at the EU level with respect to the definition of financial instruments and the legal nature of crypto-assets. The responses served to confirm the Crypto Asset Advice by ESMA, which specified that certain tokens are financial instruments and subject to the full attendant regulation, while those tokens that are not deemed financial instruments should be subject to some minimal level of regulation.
- The surveys also identified the need for greater clarity on the governance and risk management processes associated with cyber-security and cloud outsourcing. The Joint ESA Advice on the need for legislative improvements related to Information and Communication Technology (ICT) risk management requirements in the EU financial sector and the Joint ESA Advice on the costs and benefits of a coherent cyber-resilience testing framework for significant market participants and infrastructures within the EU financial sector address many of these issues.
- There exist a direct link and interdependencies between the innovation facilitators and authorizing approaches for innovative fintech business models. Innovation facilitators play a central role in mapping approaches applied to fintech and in identifying the areas where the legislation and licensing requirements need changes and adaptation. Moreover, innovation facilitators, especially regulatory sandboxes, may have an impact on the licensing regime for fintech firms and may allow for divergence from other jurisdictions. In response, ESMA jointly with the EBA and EIOPA published the report on regulatory sandboxes and Innovation Hubs in January 2019. In addition, the European Forum of Innovation Facilitators established in April 2019 aims to foster convergence in this area.
The report addresses one of the five action points of the EC FinTech Action plan, namely the mandate of ESMA "to map current authorizing and licensing approaches for innovative fintech business models in Europe."
Keywords: Europe, EU, Banking, Securities, Fintech Action Plan, Fintech, Crypto-Assets, Distributed Ledger Technology, Cyber Risk, Cloud Outsourcing, Fintech License, ESMA
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