ESMA publishes report on licencing of fintech firms across europe

The first survey, 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, if necessary, propose recommendations to adapt EU legislation to emerging innovations. The second survey, in January 2019, attempted to identify the ways in which NCAs employed the concepts of ‘proportionality’ and ‘flexibility’ when licensing FinTech firms.

The two surveys confirmed that NCAs do not typically distinguish between FinTech and traditional business models in their authorisation and licensing activities, since they concern authorisation of a financial activity, not a technology.  The key findings of ESMA's surveys, and its regulatory continuation as presented in ESMA's report, are summarised below and relate to the need for adaptation of legislation or greater clarity with respect to the following topics:

1. the NCAs called for more clarity at EU level with respect to the definition of financial instruments and the legal nature of crypto-assets.  ESMA continues to foster supervisory convergence on the topic of crypto-assets across EU Member States.
2. The surveys also identified the need for greater clarity around the governance and risk management processes associated with cyber security and cloud outsourcing. ESMA notes, however, that the joint ESA Advice (on risk management requirements and the costs and benefits of a cyber resilience testing framework) addresses many of these issues.
3. ESMA notes that there is a direct link and various interdependencies between the facilitators of innovation on the one hand, and authorising approaches for innovative FinTech business models on the other. Innovation facilitators (for example, Dutch regulatory sandboxes) may have an impact on the licensing regime for FinTechs, which may lead to regulatory divergence. In this respect, ESMA notes that it has published a report (together with the EIOPA and the EBA) with respect to regulatory sandboxes. Moreover, the European Forum of Innovation Facilitators aims at fostering convergence concerning innovation facilitators.
4. There has been ongoing discussion over need for a comprehensive EU-wide crowdfunding regime, in particular for crowdfunding based on non-MiFID II instruments. A proposed regulation for crowdfunding service providers is now under the review of the European Parliament and the Council.

Although ESMA does not put forward additional recommendations for changes in EU regulation, we as financial regulatory lawyers specialising in Fintech welcome the ESMA's report and its focus on Fintech and innovation in the financial sector.

In terms of its standpoint on innovation facilitators, however, we hope that ESMA's and the NCAs' criticism will not lead to the end of innovation facilitators and hubs in the various EU jurisdictions, including the Netherlands.  In 2016, Dutch regulators AFM and DNB launched the regulatory sandbox, aimed at providing bespoke regulatory solutions and easing market access in order to offer more room for innovation in the financial sector, and also jointly launched the ‘InnovationHub’, where new and existing market players can address their regulatory questions; another measure to further accommodate innovation. These initiatives play an important role in making the Netherlands an attractive location to establish innovative financial services providers, including payment services providers and electronic money institutions, and continue to play an important role in fostering innovation.