The European Securities and Markets Authority (“ESMA“) published a speech by ESMA Chair Steven Maijoor on taking a measured approach to Financial Technology (“FinTech“) on February 27, 2018.

Mr. Maijoor explained that there are two strands to ESMA’s measured approach to FinTech. The first strand involves monitoring innovations diligently and intelligently. The second strand is to take action in a measured way (that is, to carefully consider how best to act, weighing risks and benefits in an objective fashion). He goes on to address the following three key areas of FinTech:

Monitoring FinTech by looking at economic function. As ESMA monitors and assesses FinTech developments, it finds it helpful to keep in mind radical changes brought by FinTech and other information technology. ESMA recognises the potential for FinTech to reshape the financial sector. It has already devised a financial innovation scoreboard, with which it performs an initial assessment of financial innovations according to the risks and benefits arising from the functions they perform.

Structural features of FinTech. Understanding how the process of innovation works and taking into account its structural features enables regulators to take a coherent view of FinTech. Mr. Maijoor states that one of the overarching features across different FinTech innovations is the reliance on information technology, and that one innovation often leads to another. In some cases, successful technologies, products or services may emerge from failed innovations. This process of development is known as the “innovation spiral”. Distributed ledger technology is an example of the innovation spiral. Mr. Maijoor also refers to the notion of a “regulatory dialectic”. This is where market participants take into account existing rules and regulations when they innovate. In response, authorities may seek to amend the regulatory framework, which may then prompt further innovation and so on.

Challenges and opportunities for regulators. FinTech is a priority for financial market regulators. Mr. Maijoor refers to the European Commission’s work in this area. Following the Commission’s consultation on FinTech, it published a summary of responses in September 2017. Under the Commission’s proposals, specific new tasks for the European Supervisory Authorities (“ESAs“) (that is the EBA, EIOPA and ESMA) relating to FinTech would include four areas. These relate to pursuing convergence on licensing requirements for FinTech companies, clarifying and updating the supervisory outsourcing frameworks, co-ordinating national technological innovation hubs and work relating to cybersecurity. Mr. Maijoor states that if the Commission’s proposals are adopted, it will provide the ESAs with a clear roadmap to meet the challenges and opportunities arising from FinTech.