Attracting FinTech – second thoughts
February 2017 | PROFESSIONAL INSIGHT | BANKING & FINANCE
Financier Worldwide Magazine
The Spanish National Securities Market Commission (CNMV) made headlines in late 2016 by announcing plans to implement facilities to turn Spain into a friendlier destination for financial intermediaries considering a post-Brexit relocation, particularly FinTech companies. Operators fleeing London may expect English-language resources to be more available and, to the extent possible, benefit from a fast-track procedure to smooth the transition from one regulator to another, saving business disruptions. This initiative has been widely welcomed by commentators and supporters of the idea that Spain and its major business centres should seek their part in what Brexit will likely drive out of London. It is also widely acknowledged that the Spanish regulatory system, mostly articulated around the Bank of Spain and the CNMV, is not dynamic enough to be considered one of the country’s pros as a potential financial business hub, to say the least. This needs to be corrected to meet industry expectations.
As a reaction to Brexit or for any other reason, it is always good news to see regulators trying to keep up to date with market events and make life easier, or at least not unnecessarily more difficult, for financial businesses. However, a certain amount of scepticism and prudence is required, particularly when FinTech is involved.
The relationship between a country’s regulatory architecture – its financial laws and regulations, plus the specialised institutions that deal with their creation and application – and its financial system is complex. While regulatory architecture is one of the elements that influences the financial system, it is not the only relevant factor. The opposite is often true: the financial system and its importance for the economy influences regulatory architecture, which has been the case in the UK. The UK’s financial system – including the parts that do not, at least primarily, serve the UK as a country, but Europe at large – and the country’s regulatory architecture, represent a kind of ecosystem that is not easily transferred by parts. While the UK’s regulators, the FCA in particular, are often seen as archetypes, if not as models to imitate, mirroring their policies and solutions by continental regulators may be questioned. Given the many factors that lie behind the development of a financial system, policies that worked well in the UK might not work as well elsewhere in Europe.
All we should probably demand from our regulators, in addition to offering English-language facilities and cutting red tape when possible, is that they do their job well. This, in short, means that they make the rule of law operate properly in their domain. As in other areas of law, it is not so much about whether a regulator is more or less demanding – that is probably a legitimate policy choice to be evaluated in the wider context of a financial services country policy. It is about the regulator being accessible, having clear and well-known criteria it follows, and creating procedures in line with the law. Financial businesses often choose the jurisdictions they operate in for their intrinsic appeal and they are not normally taken aback by laws and regulations, which, increasingly, tend to be the same throughout Europe. They even assume, quite naturally, that life in Europe (and relationships with clients) does not take place in English and so translations are necessary. It is more difficult to cope with the idea that, even when the law clearly sets a time limit for a procedure, its duration may be uncertain. Much like tax, for instance, within certain limits, the matter with regulatory costs is not so much whether these are high or low, but that they are known ex ante and are reasonably certain. As elementary as it sounds, the perception, probably subjectively, is that many EU regulators are not able to deliver or at least deliver sufficiently.
Even the name FinTech conveys many positive ideas. First, it comes intrinsically coupled with the notions of technology and revolution, which are perceived as positive. FinTech is very appealing to talented individuals who would not otherwise have considered finance as a viable industry. FinTech is also clearly linked to a vector of progress in the form of high-quality job creation and fruitful interaction with other sectors. Second, the ‘tech’ suffix wipes away negative connotations generally attributed to finance and financial services. Third, it is an industry in the making, with unlimited potential. ‘Traditional’ finance is a very well-established industry that, in most of its branches in continental Europe, is showing signs of overcapacity.
FinTech businesses are desirable, and rightly so. European regulators need to foster FinTech or, at the very least, not impair its development – something UK regulators, particularly the FCA, have been successful at – so as not to pose undue obstacles to the establishment of FinTech companies. The idea that regulators should not pose undue obstacles to the development of any business sector seems hardly disputable. However, if ‘not to pose undue obstacles’ is understood as the equivalent of setting up a lighter regulatory framework, there is room for qualification.
The reasons to regulate financial services do not necessarily disappear if those services are rendered in a different way or by different operators. It is easy to miss that FinTech is often related to innovative ways of doing things in domains as delicate as payment services or credit underwriting. If so, there are very good reasons to think that the applicable regulations should be solid, and entrepreneurs should be well aware of the risks involved. It makes little sense to apply an extremely demanding, one-size-fits-all pattern, framed around universal banks, to every industry. But it also makes little sense to consider that just because we are talking about a sector in the making, possibly still not very relevant in the overall context of the financial system, a light ‘tick-the-box’ approach may suffice. It is, of course, extremely important to identify within FinTech what are financial services and what is technical support to financial services. In other words, it is extremely important to know what exactly should be regulated. Once this is done and it is concluded that we are in the field of financial services, the public goods at stake – summarised as ‘financial stability’ – must get proper attention.
‘Safety and soundness’ mean very different things in different sectors, but still seem advisable in anything related to financial services. There is enough experience to prove to EU continental regulators that public tolerance – probably reflecting a remarkable cultural difference, certainly with the US and possibly with the UK – to failure of the financial services industry is quite low.
There is no reason to think the approach to FinTech should be different from that discussed above and that the sector expects anything but good regulation, which is not necessarily equivalent to little or no regulation. The odds are that FinTech businesses expect regulators they can dialogue with and that are able to understand their business models; after that they will possibly just hope for clarity and foreseeability. All factors being equal, jurisdictions that can offer regulators environments that are responsive, easy to reach – formally and informally – and are foreseeable are likely to see their FinTech sector flourish.
Some businesses will still prefer less demanding, tick-the-box approach jurisdictions, but it is not obvious that this is the best choice, certainly not for the jurisdiction in question, and probably not for the industry.
Fernando Mínguez and Jorge Canta are partners at Cuatrecasas. Mr Mínguez can be contacted on +34 915 247 177 or by email: email@example.com. Mr Canta can be contacted on +34 915 247 953 or by email: firstname.lastname@example.org.
© Financier Worldwide
Fernando Mínguez and Jorge Canta