Fintechs and Regulators adapt to each other

The post below was first published on our Fintech blog

Companies specialising in internet and new technologies (so-called Fintechs) continue to play a key role in the French economy (for example in developing credit activities, targeting in particular the financing of small and medium-sized enterprises (SMEs) through lending platforms and crowd funding).

As a reminder:

• the purpose of Fintechs is to combine finance, technology (no more paper, it is all about finance at the click of a mouse) and swiftness (SMEs need quick answers);
• to do so, Fintechs set up (and operate) electronic platforms (Platforms) under which companies wishing to obtain finance are introduced to investors (the Investors) wishing to diversify their investments;
• SMEs will offer for sale some of their trade receivables held against their clients to the Platform; and
• to protect investors, Fintechs may enter into a credit insurance agreement with an insurance company under which either the Fintech or the relevant investor will be the insured party.

The mechanisms of the financing described above (a Platform Financing) may vary from one platform to another but any Platform Financing needs to comply with local law requirements and regulations (investment services, banking transactions, payment settlements, etc). In France for example, only duly licensed credit institutions and French securitisation vehicles (so called fonds commun de titrisation (or FCTs)) can carry out banking transactions on a regular basis. This includes, pursuant to French caselaw, the purchase of receivables before their term on a regular basis.

From a regulatory standpoint, SME financing is not the only relevant activity undertaken by Fintechs:

• Fintechs introduce counterparties to each other. The activity of intermediation per se remains a regulated activity. In addition, sourcing Investors for a "client" may fall within the scope of placement services requiring an investment services provider licence (without prejudice to the application of French banking solicitation rules); and
• the payments made through the Platform are also a very important aspect, and a specific licence of payment institution (établissement de paiement) may be required.

European legislation already impacts Fintechs (for example PSD2; MiFID). At the European level, there are no harmonised regulations for Fintechs. The European Parliament's Committee on Economic and Monetary Affairs (ECON) published a final report on 28 April 2017 on "FinTech: the influence of technology on the future of the financial sector". ECON recommends that the European Commission should present an Action Plan that boosts FinTech in Europe. ECON recommends adopting an innovation friendly approach.

The French have created task forces dedicated to the legal issues encountered by Fintechs. The French Autorité des Marchés Financiers (AMF), which is the market authority in France, created a "Fintech division" on 1 June 2016. The purpose of this division is to identify opportunities and risks to be tackled by the AMF and investors. The French Autorité de Contrôle Prudentiel et de Résolution (ACPR), which is the banking and payment services authority in France, has also created a team dedicated to the activities of Fintechs, to deal with the increase in innovative projects submitted to the ACPR. In July 2016 the AMF and the ACPR created the "Fintech Forum", a joint task force group composed of professionals in charge of dealing with regulation and supervision of the innovative projects undertaken by Fintechs.

The AMF and the ACPR are now organised to provide guidance to Fintechs, similar to the "regulatory sandbox" of the UK Financial Conduct Authority (FCA). To anticipate Brexit, the AMF and the ACPR have more generally decided to accelerate the process of obtaining a full licence in France for UK regulated entities, management companies, and Fintechs licensed in the UK. In September 2016 the ACPR and the AMF launched the "2Week Ticket" procedure for Fintechs and management companies that already have a permission granted by the FCA. This new "AGILITY" programme permits UK management companies and UK Fintechs to obtain a pre-authorisation in two weeks from the date of their application. The French full licence would then be delivered within two months.

A balance must be found between investor protection, fair competition and innovation. One pitfall is to overprotect existing players such as credit institutions by impeding the development of Fintechs. At the other end of the scale, another pitfall is to exempt Fintechs from financial regulations that apply to other players. A harmonised regime at EU level and harmonised positions of EU regulators will be important. One of the main Fintech activities is peer-to-peer lending (ie loans made by "peers" on a multilateral basis) and there is no unified EU regime in this area.

Investor protection is also very important. Robo advice (ie individual investment advice provided by a computer based on information provided by a client) may trigger difficulties under financial regulations (in particular under MiFID) as it may be difficult to make sure that algorithms-reliant models of robo advice are actually suitable and appropriate for an investor. We await, with anticipation, developments to come in this field.

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