Primary tabs

Reply S.p.A.

The issue identified by the EBA are relevant and complete but we would like to add a specific hint that can be developed in the approach suggested in the Discussion Paper. In particular, by our point of view, a point to be analysed is that the Fintech has not the same profile of the credit institutions where the requirements are stable over time. Finance and Technology are both quickly mutable and it is important to adapt the authorization and registration requirement to the mutable condition of the financial/technical market. In the same time, adding to the flexibility asked in the first part of our hint, we ask to pay attention to the market condition in which the Fintech is incoming. The opportunity offered by the new Fintech is mainly the optimization of the financial market thanks to the competitively with the current financial market players. But the financial sector, is a highly concentrated market dominated by the currente market players where the entry is very difficult for the new entrants that can offer the same financial service as current players but cheaper (reducing essentially the intermediation costs). So, one of the aim of the regulation should be to encourage the entry of such new entities to level-playing-field. In our opinion a possible solution that satisfies such needs of flexibility and pair condition are the "Sandboxing and innovation hub regimes". "Sandboxing and innovation hub regimes" seem to be more flexible than the national and EU laws. The suggestion is to value the merit of extending this technological innovation and the use of technological tools to support the procedures of adaptation, compliance, compliance with standards, regulations, laws, reports. "ReghTech" can be use in order to quickly adapt the regulatory authorization and the monitoring to the new features provided. Adding to this, our suggestion for the regulators is to base to the features of the “service offered” by the Fintech Company and not focusing on the “legal entity” of the Fintech Company that provides the service. In this way the quickly mutation of the core business of a Fintech or the quickly change of the Entity profile can be correctly and quickly handled.
The new Fintech firm obviously has not the same economic, financial, political conditions of the current financial market players, so in order to incentive the new entry, the regulation, and the registration and authorisation regimes should consider such difference in starting point as well. The application for authorization can be standardized with regard to the credit institution for which the EBA issues definitive rules specifying the credit information requirements for information on credit institutions, but these requirements should be adapted to the Fintech Company that will receive them to ensure the same starting point. The authorization can be customized considering the different cluster of Fintech based on size-based clusters, service offered, customer targeting, initial capital, and so on.
We highlight how, in last years, credit institutions have started a process of deep changing, taking into account progresses made by information and communication technology (ICT), making the range of services offered wider by renewing risk management procedures and sharpen distribution channels. This is possible also thanks to the growing interests in Fintech firms, which are cooperating with the banks in the digital transformation era through the offer of advanced technological solutions which allow credit institution to keep up with digital evolution.

In this context of deep changing, it is important to stress how the most important credit institution have increased their investment in Research and Development with the scope to analyze the impact that Fintech might generate on financial system’s processes. In a world of effectiveness/speed of processes’ execution, reproducibility and safety of the underlying technology, and the risks of the system which might be introduced by the spread of different forms of financial decentralization.
Besides risks and opportunities already reported by EBA, it would be necessary to focus on potential impacts on trading activities of a credit institution. In this framework, the implementation of fintech solution as Blockchain could bring to an optimization of all the phases of trading process, in particular:
 Pre – trading
- Optimization of security measures, transparency, and privacy management: the functionality of record keeping allows for the representation of different financial instrument in a standardized digital format and for the traceability of the changes of ownership of the asset with dedicated records.
- Mitigation of counterparty risk: the functionality of record keeping makes transaction not contestable, as each transaction is signed in a digital way, so it cannot be contested or revoked. In addition, there is the absence of double counting and there exists the possibility to check in real time fund availability, with the consequent reduction of costs of capital;
- the knowledge of your customer: automatic check of each user throughout certification on decentralized registers of the attributes which compose the identification profile of the customer.

 Trading
- Faster trade execution: transaction time are optimized, so that they can be executed in real time;
- Effective reduction of transaction costs;
- Reduction of operational risks: achieving a more efficient contract management though processes automatization.
-
 Post – Trading:
- Effective reduction of risks and settlement costs: structural reduction due to the possibility of combining clearing and settlement phases in a single step, decreasing elapsed exectution time of the trades and dispute resolution;
- Automatic communication between contractual parties: smart contracts might substitute central counterparties.

 Custody & Asset service
- Automatic management of the life cycle of the instrument (distribution of dividends, and bond coupons, voting rights, etc.)
- Reconciliation processes of automatized data.
Despite challenges coming from “digital revolution”, major banking players are consolidating a business relation with FinTech providers through partnership, in order to obtain the needed consultancy to develop new products and to obtain a more standing position in the definition of their own central role in the actual banking system.
We think that the usage of technologies that address the life of the digital currency, and already stated by EBA, might support financial institution to improve the security level and data integrity, improve services and customer’s experience and optimizing payment processes.
It is necessary to stress also data protection and privacy of the customer; in this field, the new themes come from BlockChain.
All the problems related to traditional storage are addressed with a system of distributed access authorization to data and decentralized identity creation.
In fact, many national and international financial institution began internal analysis in order to stress which are the impacts on their activities, throughout the development of feasibility study and business plan.

The goal is to improve processes and costs in term of efficiency and effectiveness, therefore profitability.
As already stated by EBA, each credit institution has its own view on making business, so each one will decide whenever it would be necessary to start implementing an internal structure, by the means of constituting R&D office and analyzing internal skills, or proceed with partnership operations with Fintech firms.

Indeed, collaboration and synergy seems inevitable: as stressed by EBA, FinTech firms need clients, capital and ways of improvement their image and reputation; on the other hand, credit institutions need innovation, simplicity and faster procedures, since these institutions are often characterized by obsolete systems.

It should be noted that Fintech collaboration may be disruptive for consolidated and running infrastructures; for this reason, specific commercial business model must be studied. In addition, a big cultural change is needed: if a credit institution decides to cooperate with a FinTech firm, it should make the view of its own employees more flexible, through the implementation of specific updates in order to cope with the evolution of the whole system.

The points under analysis are many: changes are not only structural but also cultural, strategic, functional, organizational and infrastructural.
Demand for FinTech services is growing, specially in consumer banking areas, wealth management (as for example ROBO Advisory, Lending platforms, Blockchaing).

The usage of technology is efficient in terms of asset registration, automatization of clearing and settlement operation, autonomous communication between contractual objects.

For example, Blockchain allows direct interaction between investors, cutting out intermediation and easing time reduction for trading, allowing for an instantaneous timing settlement.

In our opinion, it is clear that for credit institution the collaboration with FinTech firms represents a big opportunity.In our opinion, it is clear that for credit institution the collaboration with FinTech firms represents a big opportunity.

Indeed the presence of new players on the market will change the business model in a more technological and consistent one. The challenge is both to specialize processes and build vertical skills on specific areas, such as financial advisory, trading and corporate banking.

In a contest dominated by low profitability, credit institutions should combine ordinary management, which main goal is to optimize short-term results, to prompt actions oriented to the evolution, even radical, of their business model; examples of these actions may be represented by the participation to FinTech initiatives for some supply area of the bank.

The areas which might undertake major changes are:
• IT area – financial institution must be ready to operate in a system characterized by constant changing;
• Legacy system – it must undertake a simplification in order to cut out relative costs;
• Marketing – for example, technology might give access to data and information on consumers, letting credit institutions being able of satisfy clients with their own desire, increasing customers ‘satisfaction and trustworthiness (customer intelligence).

Indeed, considering the impacts of technologic innovation, new business models might be obtained, which comprise areas from alphabetization to retail banking, from investments to crypto-currencies. Indeed the presence of new players on the market will change the business model in a more technological and consistent one. The challenge is both to specialize processes and build vertical skills on specific areas, such as financial advisory, trading and corporate banking.

In a contest dominated by low profitability, credit institutions should combine ordinary management, which main goal is to optimize short-term results, to prompt actions oriented to the evolution, even radical, of their business model; examples of these actions may be represented by the participation to FinTech initiatives for some supply area of the bank. The areas which might undertake major changes are:
• IT area – financial institution must be ready to operate in a system characterized by constant changing;
• Legacy system – it must undertake a simplification in order to cut out relative costs;
• Marketing – for example, technology might give access to data and information on consumers, letting credit institutions being able of satisfy clients with their own desire, increasing customers ‘satisfaction and trustworthiness (customer intelligence).
Indeed, considering the impacts of technologic innovation, new business models might be obtained, which comprise areas from alphabetization to retail banking, from investments to crypto-currencies.
During last years, investment ventures in digital currencies have been growing. Digital currency, in particular the underlying technology (Blockchain), is feeding the growing interest of the entire financial system. Benefits like having a unique currency, obtaining a standardization of payment systems are really clear within financial world.

In fact, last year credit institutions have joined entities like ABI, EBA and ESMA, in order to try to dispose a regulation coherent with this phenomenon: digital currency is not yet regulated and it is not possible to design it as a payment system in a credit institution. Nevertheless, credit institutions have already started, within their structure, analysis whose scope is to evaluate the grade of efficiency that could be achieved within processes, throughout these new electronic payment systems.
The issue identified by the EBA are relevant and complete but we would like to add a specific hint to develop in the approach suggested in the Discussion Paper. The need for clarity about the services provided by Fintech and the consumer protection they have to guarantee could be met through the introduction of an international regulation whereby a format for the provision of services provided by Fintech companies should fill in indicating the traceability of the service delivered, independently on the registration and on the request for authorization. For instance, the Fintech Company should indicate:
1) The legal head office where the service is provided;
2) Country where the service is delivered;
3) Target consumers
4) In case of service failure / performance defects, specification of the coverage guarantee
5) Classification of the technology used
6) Indication of a contact point / referent / office collecting complaints and providing feedback within the terms indicated also in the contract, reimbursement and penalty
7) Specification of Stress Test passed before the entrance in the market
8) Specify if a RegTech will be used by the company. Please, consider that the ReghTech aims to help business and organizations not only to be compliant with the various regulations and especially where the bureaucratic is highly structured and the changes in regulation are very frequent, but also to understand better how regulations can be used to improve the performance of the organization itself.
The issue identified by the EBA are relevant and complete but we would like to add a specific suggestion to the way forward proposed. In particular, we ask to pay specific attention to a possible solution to improve the consumer protection in the case of cross-border provision. Our suggestion is first following the recommendation of the European Commission to apply to the Fintech the same regulations as consumer protection independently on the distribution channel of the service and the location of the user or company. This is the generic principle to follow in Fintech regulation and not only for the protection costumers. By our point of view, it is necessary to ensure that the guideline followed for the Fintech regulation, is the service typology provided by the Fintech Company and not the Company itself, the legal nature of the Entity/Company, the location of provision, the location of costumers, and so on.
Secondary, we would bring a practical model to be inspired. We are referring to the experience of Consumer Protection Cooperation Network and FIN-NET institute strongly wanted by the European Commission.
The Consumer Protection Cooperation (CPC) is a network of authorities responsible for enforcing EU consumer protection laws in EU and EEA countries. Broadly, it functions as follows: any authority in a country where consumers' rights are being violated can ask its counterpart in the country where the trader is based to take action to stop this breach of law. The Consumer Protection Cooperation (CPC) Regulation sets a list of minimum powers, which each authority must have to ensure a smooth cooperation. These include power to obtain the information and evidence needed to:
-tackle infringements within the EU
-conduct on-site inspections
-require cessation or prohibition of infringements committed within the EU
-obtain from traders undertakings and payments into the public purse.
-Authorities can also alert each other to malpractices that could spread to other countries.
-Authorities, with the Commission's support, can also coordinate their approaches to applying consumer protection law so as to tackle widespread infringements.
(http://ec.europa.eu/internal_market/scoreboard/performance_by_governance_tool/consumer_protection_cooperation_network/index_en.htm)
FIN-NET is a Financial dispute resolution network that helps customers resolve cross border dispute out of court (https://ec.europa.eu/info/business-economy-euro/banking-and-finance/consumer-finance-and-payments/consumer-financial-services/financial-dispute-resolution-network-fin-net_en)
(Bruxelles, 23.3.2017 COM(2017) 139 final: http://www.europarl.europa.eu/meetdocs/2014_2019/plmrep/AUTRES_INSTITUTIONS/COMM/COM/2017/09-04/COM_COM20170139_IT.pdf)
The main advantages brought by this kind of institution are that the consumers can rely on their rights without having to apply to the courts, by resorting to alternative dispute resolution entities. The typology of intervention offered by such alternative entities are for sure faster and immediate because it is not necessary to apply to the European Courts.
A regulatory obstacle is certainly the lack of legislation that does not legitimize the sandboxing regime at Community level. The lack of a sandboxing scheme at EU level means that many start-ups cannot test whether their service can compete outside their country of residence and therefore are limited in the development of their business to the detriment of the efficiency of the single market that Fintech should guarantee.
The issue identified by the EBA are relevant and complete but we would like to add a specific suggestion to the way forward proposed. We would like to focus on the complaint handling policy we propose as a standard template. The competent authority should make sure that:
1) a "complaint handling policy" is present in the Fintech firm. This policy should be defined and approved by the top management of the company, which should also be responsible for its implementation and for the monitoring of policy observance;
2) this "complaint management policy" should set out in a document (written), for example in the context of a (fair) treatment policy general".
Such competent supervisory authority should ensure a continuous monitoring by their side: the competent authorities should make sure that companies analyse it ongoing complaint management data, in order to identify and address any recurring or systemic problems and potential operational hazards. A good practice to suggest is to ask to the Fintech is to adopt the typical Ticket Service Management approach:
1) Analysing the causes of individual complaints in order to identify the common causes to the types of complaint;
2) Assessing whether such grounds may also affect others procedures or products, including those not directly denounced; is
3) Resolving where this is reasonable, on such root causes.
The issue identified by the EBA are relevant and complete but we would like to add a specific suggestion to the way forward proposed. There are many innovative and very cheap methods of adapting the business to the compliance that are often overlooked: Developments related to the verification of digital identity are among the most promising developments of RegTech in recent years. Online and KYC verification procedures are much cheaper for users without compromising security The KYC framework would facilitate the introduction of truly cross-border financial services market and greatly reduce compliance costs for digital businesses. (KYC rule: consumer knowledge has been transposed in Europe with Mifid).
The issue identified by the EBA are relevant and complete but we would like to add a specific suggestion to the way forward proposed. We would like to suggest a focus on the importance of the digital education. The Fintech consumers should have both financial and technological knowledge in order to understand the overall risk that to take when they decide to resort to a Fintech service. So, adding to the typical financial risk (liquidity risk, credit risk, market risk) the consumers should be informed about cyber risk, privacy data risk, IT risk, and so on. In addition to addressing financial and digital education for end-users, it is necessary to verify / ensure adequate financial, technical and digital preparation in service-providing businesses (knowledge of regulatory requirements, risks such as sensitive IT attacks - industry financial risk is subject to 3 times higher risk of attacks than other sectors). This would reduce the risk for the users themselves.
In our opinion, a noteworthy aspect is that if there is full transparency and understanding by the end users, the courage of the users themselves increases with respect to the services offered by the financials increases and then the demands of Fintech services can increase. In order to extend financial and digital culture among consumers, a European Education Program about Digital and Financial Services can be promote. Moreover, Fintech Service firms must collect all the relevant information of end users in order to define the consumer’s profile and understand if the profile defined is aligned with the services provision from the company.
As highlighted in the EBA’s survey, different practices are emerging across jurisdictions regarding FinTech firms’ requirement in order to have a resolution plan. This behavior is related to a missing compulsory for FinTech firms to be compliant with the EU law, as indeed DIRECTIVE 2014/59/EU.
In order to safeguard the final users of FinTech firms a dedicated “smart-regulation” should be issued based on the kind of financial services provided by the FinTech firm, as indeed the four clusters used in the survey (table 1): Credit, deposit, and capital raising services; Payments, clearing and settlement services; Investment services/Investment management services and Other financial-related activities.
Since FinTech firms have as core factors to be both strongly related to new emerging technology and very quick in their evolution, then the related recovery and resolution plan applied to these companies has to be smart and easy to be compliant. It is fundamental to avoid slowing down the evolution of the FinTech companies and enable them to handle the technology to be compliance with regulatory requirements.
A potential structure could be the following:
- FinTech clusters must be identified across countries;
- A dedicated law for recovery and resolution plan must be issued in digital way for each FinTech cluster;
- Each country must have a dedicated sandbox or innovation hub for each FinTech cluster;
- Recovery and resolution plan regulation must be digitized and embedded in the sandbox or innovation hub regime. For this purpose could be useful RegTech technologies;
- A FinTech company before to provide its services to final users must pass the control through the sandbox regime that will check if the recovery and resolution plan is compliance with EU law;
- Since the recovery and resolution plan requirement are digitized then the sandbox regime controls are automatized thus the checks will be very fast and accurate. In this way, we will get more controls on FinTech firms without blocking them with conservative regulatory framework.
Sergio Guirreri
+39 3426086706