FinTech is a term used for multiple purposes, and several different definitions have been already proposed for it. The EU commission adopts the definition provided by the Financial Stability Board, that uses FinTech to describe technology-enabled innovation in financial services that could result in new business models, applications, processes or products and could have an associated material effect on financial markets and institutions and how financial services are provided.
Recently, the EU published an Action Plan for FinTech. This sector is taking the attention of EU since it is growing up fast and the impact of these new technologies on the way consumers and firms use/provide financial services is still under evaluation. There are many FinTech solutions rolling out using digital identification, cloud storage/processing, mobile applications, artificial intelligence, blockchain, etc. Innovative solutions are expected to promote citizens inclusion, support operational activities, and improve the competitiveness of EU in the world financial sector. However, there are several challenges related to these technologies, for example, increase of the risks of cyber-attacks, economy crash, and fraud.
Regulatory and supervisory entities are working hard to make the legislation evolving and to give better tools to coordinate and monitoring FinTech activities. Outside of Europe, national authorities are experimenting new frameworks for evaluating risks of innovative firms. These frameworks are called regulatory sandboxes. A regulatory sandbox is a framework set up by regulators that allows FinTech firms to evaluate their product/service under a controlled environment, monitored by regulators. Australia, Hong Kong, Singapore and Canada are some of the countries that have already defined and implemented regulatory sandboxes.
Regulatory sandboxes require high competences of regulators in advanced technologies. To provide training to regulators, the new EU FinTech Action Plan also proposes to create FinTech Labs, i.e. non-commercial laboratories to share knowledge on advanced technologies. It can take several formats like demonstrations by experts/inventors, discussions groups, workshops, etc. The idea is to get a better understanding of the technologies and put regulators in touch with industrial experts.
It is then clear that regulatory sandboxes claim for a close collaboration between IT and legal experts, such as the one advocated by Legal Informatics Luxembourg.
An expected consequence of the EU Action Plan for FinTech is to have more dynamic legislation that will progress with the same speed of technological advances, in order to assure a fair balance between risks and opportunities. However, the compliance with legislation will also be a challenge. Costs associated with compliance are very high. In 2015, in Luxembourg, banks spent €458m to cope with the various regulatory evolution. It represents 35% – 51% of their investment costs (cf. this link), and it is expected to increase in the next years, or double until 2022 (cf. this link). But non-compliance also has a cost. Since 2008, regulatory authorities imposed more than $300 billion to banks as penalties for failing in applying regulations (cf. this link).
As for the finance sector, innovative technologies can also support compliance checking activities. These technologies have the potential to reduce compliance costs and changing the relation between regulators and regulated. It can potentially improve the transparency in the sector and give to regulator access to structured, harmonized, and customized data in order to make supervision faster and efficient. From the other side, Banks will reduce their compliance costs and operational risks without compromising the quality of their services.