The main points from a major EU report on fintech regulation

13 Dec 2019

Image: © Sergey Novikov/

An expert group was tasked with reviewing the application and suitability of the existing EU legal and regulatory framework when applied to fintech.

In June 2018, a group was set up by the European Commission comprised of financial sector experts, and today (13 December) it finally published a report entitled 30 Recommendations on Regulation, Innovation and Finance.

The group, known as the Expert Group on Regulatory Obstacles to Financial Innovation, was tasked with reviewing the application and suitability of the legal and regulatory framework in the field of fintech.

In today’s report, the group recommends action in four broad areas:

  • Responding to new and changed risks caused by the use of innovative technologies such as AI and distributed ledger technology
  • Removing fragmentation across the EU and ensure a level playing field between different participants in the financial services sector as they leverage new technologies
  • Reconciling data protection with the opportunities offered by fintech
  • Considering the potential impact of fintech on consumers, from the perspective of financial inclusion and the ethical use of data

Inconsistent legal framework

Dr Philipp Paech, associate professor of financial law at the London School of Economics, served as chairman of the Expert Group. Commenting on the publication of the report, he said: “Much of what is called ‘fintech’ is already covered by EU law, albeit not very consistently.”

Paech added that there are only a few entirely new risks to consider, with big tech companies such as Google and Amazon posing the biggest challenges in regulation. Another particular challenge is 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 homegrown global champions, and to remain amongst the global standard setters in finance, in particular with respect to consumer protection.”

‘Technologically neutral’

The group is calling on policy makers to act on the potential of fintech to deliver greater choice and improved efficiencies to the financial products and services market, while making sure that the regulation and supervision remains fit for purpose in the digital age.

Another recommendation of the group is that an updated regulatory framework is put in place to leverage the benefits of fintech, while remaining focused on consumer protection, market integrity and the stability of the EU financial system.

The group said: “Delivered well, it should also have the effect of protecting and enhancing the attractiveness of the EU as a global financial centre.”

The experts stressed that the aims and recommendations outlined in the report should be pursued in a way that is technologically neutral, “in the sense that it does not differentiate between the different technologies that can potentially be used to provide a service, offer a product or perform a function, or between different service provides.”

Inclusion and ethical use of data

Cross-sectoral and international cooperation will be “crucial” in setting relevant standards, due to the often borderless nature of fintech, the group added.

Overall, the report placef significant importance on the ethical use of data. The group behind the report recommended that the European Commission should develop guidance to assist financial institutions in the ethical use of data in the provision of financial services.

It said that the commission should monitor the increasing use of technology-driven financial services in society, while taking action to promote the use of fintech as a means to address financial inclusion and not cause unfair discrimination.

Risks associated with AI

The report also outlined that while AI can bring significant efficiency gains to financial services, it also carries some specific risks.

In a statement, the group said: “As with other areas of regulation, efficiency gains and associated risks are two sides of the same coin. Hence, regulation must strike a fine balance in this respect.

“The Expert Group recommends actions to clarify the circumstances under which requirements aiming at explainability or interpretability of AI and associated technologies are appropriate.”

The group emphasised the importance of taking action in relation to the access and use of data in the context of AI and machine learning.

“It is essential that a balance is struck to ensure that data subjects are empowered to determine who can access their data and for what purpose.

“GDPR represents a world-leading standard for the protection of personal data, however the Expert Group observes that clarifications about the application of GDPR and other relevant legislation in relation to the use of innovative technologies in the financial sector is needed in order to ensure that innovation is not inadvertently stifled by these important measures.”

How should DLT, blockchain and crypto-assets be regulated?

Distributed ledger technology (DLT) and blockchain are similar to AI, in that the technology itself does not need to be regulated, the group said. The report looked at how the market applies this technology, for example, in back office functions, for creating units resembling money or securities, or functions resembling payments.

The group said it that the application of EU regulation to DLT networks needs to be clarified in order to smoothly comply with existing rules, which were drafted on a vision of a financial market that is organised in bilateral relationships such as accounts – whereas DLT and blockchain applications are designed on the basis of multilateral relationships.

With crypto-assets, the group noted a need to remove the uncertainty associated with the unclear classification of those assets within the existing regulatory framework, and to address specific risks relating to money laundering and counterfeiting, client asset segregation and customer protection. It was recommended that the commercial legal framework around this is clarified.

The 30 recommendations can be read in full here.

Kelly Earley was a journalist with Silicon Republic