Description of the sector
Financial Technology, or “FinTech” is not a sub-sector of financial services in the traditional sense of describing a particular activity or business model within the wider financial services market. Rather, it is a label applied to firms operating across a wide range of financial services sectors, which use new technology to provide services in new ways. Whilst technological innovation has always been a key driver of progress in financial services, Fintech is marked out by the way a range of emerging, general purpose technologies are being harnessed to change how financial services are delivered across a range of different product-types and customer segments.
The current EU regulatory regime
There is no regulatory regime for FinTech. FinTech firms are regulated according to the activity they carry out. The main activities3 that are affected by EU regulation are:
– Neo-banks, which are regulated in the same way as other deposit-takers;
– Payment firms (section three, above), which are covered by the current Payment Services Directive, the Payment Services Directive II from 13January 2018 and the second E-Money Directive where relevant; and
– Alternative finance firms engaged in the trade of transferable securities, which are subject to the Markets in Financial Instruments Directive (MiFID).
Other areas such as alternative finance and digital currencies are generally not regulated at the EU level, though the European Commission has stated that it is exploring whether European-level policy action in this field is needed. Likewise, there are tech firms that do not provide regulated financial services: examples might include businesses providing expert systems that identify compliance issues for banks, or robo-advice services that firms then badge and use with their clients.
Beyond financial services regulation, there is a clear read-across for FinTech firms from EU regulation around the handling, storage and protection of data, since this is a key requirement for many of the business models set out above.
UK regulatory environment
In 2014, the Financial Conduct Authority (FCA) launched Project Innovate, aiming to encourage innovation in financial services in the interests of consumers. The FCA’s approach to innovation has been imitated abroad and is widely credited as a significant factor supporting the strength of the UK FinTech sector. The Bank of England has launched a FinTech ‘accelerator’ in 2016, in order to gain insight into FinTech products, concepts and firms and to give FinTech firms insight into the work of the Bank.
Existing frameworks for how trade is facilitated between countries in this sector
The arrangements described in this section are examples of existing arrangements between countries. They should not be taken to represent the options being considered by the Government for the future economic relationship between the UK and the EU. The Government has been clear that it is seeking pragmatic and innovative solutions to issues related to the future deep and special partnership thatwe want with the EU.
With respect to international trade, the World Trade Organization’s General Agreement on Trade in Services (WTO-GATS) establishes a baseline for trade in services including in relation to all financial services, including FinTech. This has been developed through EU FTAs with, in particular, South Korea and Canada.
More widely in financial services, there are well-developed principles at the international level which seek to support cross-border activity and avoid duplicative regulation and fragmentation. These are set out in more detail in the wholesale capital markets report.