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UK calls on EU policy makers to 'avoid premature regulation' that could hamper fintech innovations

The UK government has called on EU policy makers to "avoid premature regulation that could hamper, not foster, growth" in the financial services sector and help encourage "emerging financial services technologies".11 Feb 2016

The comments from the Treasury were made in a response to a European Commission consultation which had asked for feedback on whether there are unnecessary regulatory burdens, gaps or inconsistencies in the rules, or laws that hinder economic growth in the EU's legal framework for financial services. The Commission has published the individual responses it has received to its consultation, which includes a submission from the UK Treasury. The Bank of England recently published its own response to the consultation.

A strand of the Treasury's consultation response focused on highlighting technological change impacting the financial services sector and contained recommendations on the approach EU policy makers should take to legislation and regulation.

The Treasury called on the Commission to review the existing Distance Marketing Directive, which it labelled as "out of date". The review should ensure the legal framework accounts for "emerging platforms and technology", to better account for issues like how firms can meet disclosure requirements when engaging with customers that use mobile devices, it said.

"Legislation makes specific mention to outdated technology, such as fax machines and floppy disks, but makes no allowance for the needs of new platforms," it said. The length of time taken to implement legislation exacerbates differences between original legislation and changes in technology. Financial services regulations covering communication with customers should be reviewed to make sure that they are fit for purpose given the increasing use and development of technology in consumers' purchasing habits at the domestic level."

"More widely, the Commission should seek to future proof new legislation by default as far as possible by using technology neutral language across the entire [body of EU law]. The Commission should avoid being too prescriptive in the language … and instead use terms that can be adapted to fit changes in technology in order to allow innovative companies to take a more flexible approach to communicating with customers," it said.

On the subject of digital currencies the Treasury said the European Commission should assess how to apply anti-money laundering rules to "digital-to-fiat currency exchanges" but seek to ensure that the rules do not prevent "legitimate actors" from continuing to "operate, innovate and deliver benefits to consumers, businesses and the wider economy".

In a recent action plan aimed at strengthening the fight against terrorist financing, the Commission said it will bring forward legislative proposals that, if implemented, would see "providers of exchanging services between virtual currencies and 'fiat' currencies" subject to AML controls. It said this would be done by "extending the scope" of EU anti-money laundering rules that were finalised last year.

The Commission said at the time that it would "examine whether to include virtual currency 'wallet providers'" within the scope of AML rules too. It also said it will consider placing virtual currency exchange platforms subject to "the licensing and supervision rules" set out in the new Payment Services Directive (PSD2).

The Treasury has already outlined plans to apply UK AML rules to digital-to-fiat currency exchanges. Those plans were laid out last March under the previous coalition government in the UK. At the time the Treasury said it would "formally consult on the proposed regulatory approach early in the next parliament".

In its consultation response the Treasury said its plans are "proportionate" and cautioned against apply AML controls to other types of digital currency transactions, such as those carried out via digital wallets. It said doing so would be "excessively burdensome on regulated firms and would be disproportionate to the risk posed by this wider group of providers".

"The National Crime Agency in the UK has found little evidence to indicate that digital currencies are used by established money laundering (ML) specialists or that they play a role in terrorist financing (TF)," the Treasury said. "This strongly suggests that the overall level of money-laundering and terrorist-financing conducted through digital currency networks is low."

"Nevertheless, while the ML/TF risk is low across the whole digital currencies sector, respondents to the UK’s call for evidence pointed out that the point of exchange between digital and fiat currencies could carry an ML/TF risk as it is the point at which users 'cash in' and 'cash out' of the digital currency network. For this reason, the UK government intends to target AML regulation at these digital-to-fiat exchanges," it said.

In its consultation response the Treasury also called on the Commission to align e-money rules with PSD2 "at the next feasible opportunity". There is currently duplication across both PSD2 and E-Money Directive (EMD), it said. E-money institutions should be "classified as payment service providers" and regulated under PSD2 "to allow for consistent regulatory treatment across industry", it said.

"For example, the conduct rules for e-money issuers should be completely aligned with those for payments services providers in PSD2," the Treasury said.