In a new report, the European Supervisory Authorities (ESAs) – the European Banking Authority, the European Securities and Markets Authority and the European Insurance and Occupational Pensions Authority – said a lack of cooperation between financial regulators across the EU could be hindering businesses from growing their offer of innovative new fintech services beyond national borders.
"The reported innovation facilitators currently operate on a national level," the report, which looked into regulatory sandboxes and innovation hubs in operation in EU countries, said. "This is one factor that has the potential to impede the scaling up of financial innovations across the EU."
"For example, firms may find that different competent authorities adopt different regulatory and supervisory stances towards the same innovation leading to challenges in extending the innovation in more than one member state. This may also present risks in terms of ‘forum shopping’ and regulatory arbitrage, undermining the level playing field. By way of another example, at present firms who have tested successfully innovations in a regulatory sandbox may face practical barriers to the application of these innovations in other member states. For instance, firms may have to enter into extensive dialogue to explain again the concept of the innovation and measures to mitigate any risks, and may even be required to test again the proposition causing delays to roll-out," it said.
The ESAs suggested the introduction of "an EU network of innovation facilitators" could help address the problem. Participation in the network would be "open to all competent authorities in the EU", they said.
"This could provide a platform for practitioners/experts to support participating authorities in reaching common approaches to firm-specific questions elevated to the network about regulatory and supervisory expectations regarding the treatment of financial innovations," the ESAs said. "In this sense it could promote greater convergence and support scaling-up (with firms receiving, as a result of network discussions, coordinated responses)."
"Additionally, the network could serve as a forum among competent authorities and the ESAs to enhance financial innovation technical capacity while sharing knowledge as to the operation of innovation facilitators. This cooperation may come in the form of, for example, taking common approaches to specific innovations and, sharing testing results of selected innovations by competent authorities in case of sandboxes and providing feedback to participants as to lessons learned," they said.
The new network could be established alongside new EU-wide guidance that would "promote a common approach" to how regulators agree bilateral or multilateral frameworks for collaborating on fintech innovation, the ESAs said.
However, the EU regulators conceded that the proposed new network and guidance may not resolve all the issues hampering companies' scale-up ambitions.
"The fact is that many reported impediments to scaling are derived from national provisions that determine definitions of financial instrument/services which are based on the directives transposed differently into national member state laws, or conduct of business requirements that may differ across member states," the ESAs said. "These differences, may make it difficult to have a shared understanding of what is subject to authorisation and licensing when it comes to innovative firms, products and processes and the applicable regulatory and supervisory requirements."
"Accordingly, a multipronged approach is needed as issues of this nature cannot be solved effectively through guidance or network arrangements, albeit such arrangements may support information exchange on particular innovative practices in relation to specific products, services or business models," they said.
Luke Scanlon, a specialist in fintech at Pinsent Masons, the law firm behind Out-Law.com, said: "While the report highlights some of the challenges in moving towards closer alignment between regulators, the fact remains that the closer regulators are on interpretation the better it is for everyone. Therefore, while these challenges exist they should not be seen as barriers to setting up regulatory networks."
Currently, 21 EU countries have established fintech innovation hubs, and five have regulatory sandboxes in operation. The first regulatory sandbox for testing fintech innovations was established by the UK's Financial Conduct Authority (FCA).