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Financial Innovation Day

Financial Innovation Day

The European Securities and Markets Authority (ESMA) held its third Financial Innovation Day for regulators, on 10 February 2017, focusing on Fintech.

Fintech is the fusion of finance with technology and around 20 experts drawn from both the industry and regulatory authorities were invited to participate in four panels. The first panel set the scene discussing the future of Fintech, with the following three panels each focusing on different aspects of Fintech which ESMA considers important and is monitoring.

 

    Panel 1 - The Future of FinTech and its Regulatory and Market Challenges

    FinTech innovations challenge regulators to reconsider traditional regulatory and supervisory practices.  They are not easily grouped but are a heterogeneous cast of products or processes that cuts across banking, insurance and the securities markets.  Existing regulation may not have been intended for such innovations while prevailing supervisory practices may be ill suited.   Moreover, they are not easily contained within regulatory boundaries, but typically rely on the internet for distribution and often operate across borders.  The regulatory challenge is enhanced when the innovation is at a stage that it is not known as to whether the would-be economic and social benefits outweigh the potential risks.  The panel addressed when does the regulator recognize the difference between when an innovation is ‘too small to care’ and when it is ‘too large to ignore.’

    Panel 2 - Artificial Intelligence and Big Data in the financial sectors

    ESMA, jointly with EBA and EIOPA, is currently consulting on the use of Big Data by financial firms. Comments are welcome: the consultation closes on 17 March 2017. The Big Data phenomenon encompasses the use of machine learning techniques, which are a form of Artificial Intelligence (AI). The panel discussed how Big Data sources and tools, with AI techniques, are used in the financial sector in comparison with applications from other sectors such as in medical research. One challenge identified was that of ensuring people from across organisations and with different expertise can collaborate to make effective use of the tools in question. Another topic was the use of AI tools to identify investment strategies. The panel discussed how performance in such a context will depend on the specific task and design of the tools; desirable and undesirable consequences of AI-powered investment are possible, just as when human beings carry out such tasks without the aid of AI.

    Panel 3 - Can DLT reshape securities markets infrastructures?

    ESMA recently published a report on DLT, setting out the possible applications, benefits and risks of DLT but concluding that regulatory action is premature at this stage, given the technology is still at an early stage. During the panel, DLT-designers and market participants provided an update on where they were in terms of applications of DLT to securities markets and post-trade services in particular. The rest of the discussion focused on how they and regulators could work to overcome or reduce the key challenges in terms of interoperability, governance and security attached to those applications.

    Panel 4 - How can Fintech improve the consumer experience?

    ESMA, jointly with EBA and EIOPA, issued a report on automation in financial advice at the end of 2016. The ESAs will continue to monitor this phenomenon, often referred to as robo-advice, given its growth potential. During the last panel of the day we exchanged views on potentialities and limits of this new phenomenon and how automated advice may impact retail investors. We also discussed the differences between the European and US market of robo-advisers and the possible reasons for the different development of the phenomenon on the two sides of the Atlantic. Finally, we tackled the regulatory aspects and tried to understand to what extent regulators and supervisors should react to this new form of business and what are the challenges for them in supervising this activity.

    Speeches from the Day

    Jean-Paul Servais, President of the Belgium FSMA and Chair of ESMA’s Financial Innovation Standing Committee, opened the event and Cora Van Nieuwenhuizen, Member of the European Parliament (EP) and Fintech rapporteur on behalf of the EP, gave the keynote speech.

    Steven Maijoor, ESMA’s Chair, closed the day with reflections on the discussions and the role of regulators in Fintech developments.

    ESMA’s financial innovation role

    ESMA monitors financial innovation to ensure that supervisors, policy makers and market participants are aware of innovations that may undermine investor protection, give rise to financial instability or threaten market integrity while at the same time appreciating that financial innovation can also beneficially contribute to the economy. Its Financial Innovation DayFs are a primary source of knowledge for this activity.

    To find out more about ESMA’s financial innovation activities, see our dedicated financial innovation page.