Financial technologies need specific legal solutions and an open approach to the law.
There are lots of indications that financial technology, or FinTech, is one of the next chapters in the digital revolution unrolling before our eyes. The role of finance in the economic life of the society was laid bare by the last financial crisis. The tragic consequences of errors committed on Wall Street, i.e. in the financial sector, were quickly felt on Main Street—in the real economy of enterprises, investors, and retail users of financial services.
In the aftermath of the crisis, the financial system is undergoing a major metamorphosis, in large measure forced by numerous new regulations designed to protect against similar upheavals in the future.
But this is just one trend in the changing financial sector. The second, perhaps more significant, involves the growing role of innovative applications of technological solutions in specific areas of the financial system. Of course tech in finance is nothing new. The history of one of the most popular products on the financial market, the credit card, reaches back to the first half of the 20th century—a time when no one had dreamed of electronic chips or even magnetic strips.
The current digital revolution has accelerated technological changes on financial markets. The rapidly growing role of FinTech is a fact on the ground.
Sometimes outdated and unrevised legal solutions raise a barrier to the growth of new technologies. Delays in adopting new regulations create threats to the security of users and the legal certainty of providers. Conversely, regulatory blank spots can create room for adoption of innovative goods and services.
So, is Polish law ready for FinTech?
Wide range of FinTech solutions
The term FinTech covers a wide and varied assortment of technology solutions with financial applications. FinTech should no means be of interest solely to tech firms and financial institutions. FinTech solutions are used a by enterprises and consumers in such fields as:
- Retail banking
- Mobile banking
- A broad cross-section of consumer finance
- Currency exchange
- Peer-to-peer loans
- Digital currencies
- Financial and investment advice
- Securities trading
- Personal finance
FinTech solutions are also based on various technologies—sometimes classic IT, but there are other examples of entirely innovative means such as blockchain.
Laws most often applied to FinTech
The variety and innovativeness of FinTech solutions means that each solution requires its own legal analysis. Sometimes a “regulatory test” is required—a comprehensive examination of what regulations will apply to a solution, and how they will be applied. A legal analysis should be an element of risk management for every innovative product or financial service.
In Poland, the laws most often analysed in the FinTech context include:
- Payment Services Act. The fundamental legal act for all FinTech solutions in the area of payments, covering for example payment transactions (acquiring, intermediation in other types of payment transactions, issuance of electronic money, issuance of payment instruments). This act provides for a number of exemptions which if properly exploited can exclude a given product or service from application of the act.
- Consumer Credit Act. In the case of issuing loans or credit to consumers, as well as intermediation in such activity, this act must not be overlooked.
- Consumer Rights Act. Although this is a general law, it often applies as well to activity in the FinTech area, particularly as it contains a special chapter devoted to financial services provided at a distance.
- Act on Combating Money Laundering and Financing of Terrorism. This act applies mainly to various types of financial institutions or participants in financial transactions, but sometimes it will apply as well to FinTech providers.
- Foreign Exchange Law. This law governs currency exchange services. Although it applies mainly to cash exchanges, not money in electronic form, it must be considered when analysing many innovative services or financial products containing an element of currency conversion.
This is not an exhaustive list. Other regulations examined in the FinTech context concern banking, investment funds, insurance, securities trading, data protection, electronic services, trust services, and settlement of accounts.
Entirely new regulations which may have a serious impact on the development of FinTech solutions should also be mentioned. These include Trust Services and eID regulations, as we discussed here.
Sometimes it is also essential to consider foreign regulations. In particular, offering of products and services across borders raises the question of the extent to which the laws from other jurisdictions will apply. This is vital as in the case of FinTech the success of a product or service often depends on the ability to scale the operations appropriately. That will make it necessary to offer the solution in numerous countries. Sometimes the regulations are helpful, for example in the case of “passporting” of financial services within the European Union, which basically means providing services under a licence obtained in another member state.
Positions taken by regulators, such as the Polish Financial Supervision Authority, can have a major impact in practice, and should be taken into consideration when analysing any FinTech solution.
It is hardly possible to overstate the role of European Union law in shaping national regulations in this area. Many of the laws mentioned above are implementations of EU law. Often the regulations drafted at the EU level address issues not previously regulated in national law. When designing FinTech solutions, EU law must be carefully reviewed.
Are the laws cited above suited to the needs of the FinTech industry? Certainly not all of them. There are however positive examples—the growth of online currency exchanges in Poland has demonstrated that regulations do not have to be a barrier. For this reason, it should not necessarily be assumed that it will be easier to operate a FinTech business somewhere other than Poland (e.g. in the UK) because regulations are lighter or the regulator takes a more advantageous approach.
There does not appear to be a burning need to adopt a special FinTech Act for the industry. Instead, the existing regulations should be updated and adapted to meet the challenges of the digital economy and innovative FinTech solutions.
The role of security
The growing scale of threats to cybersecurity may pose a barrier to development of FinTech solutions. Innovative services and financial products are exposed to cyber threats perhaps to an even greater degree than traditional financial solutions.
The last financial crisis also showed that public authorities need to place greater stress on systemic risks to the financial markets. Potentially, FinTech solutions could increase this risk.
What is required, therefore, is a carefully considered public policy that ensures an adequate level of safety of new products and services while fostering the innovativeness of the FinTech sector.
Good standards and an open attitude
The value of tools other than hard legal regulations also cannot be overstated. London’s success in laying claim to the title of world capital of FinTech has been encouraged among other things by adoption and implementation of the appropriate strategy by government bodies, as well as the open nature of the activity of British regulators.
For example, following the lead of the UK’s Financial Conduct Authority, regulators in several other jurisdictions plan to roll out a “regulatory sandbox”—a special programme for innovative startups from the FinTech industry allowing them to test their products and services under market conditions without having to meet all of the standard regulatory requirements.
A similar approach is needed in Poland as well. The innovative banking system in Poland offers a good platform for development of FinTech products and services. The legal regulations should not stand in the way, and that requires an encouraging outlook on the part of the authorities.
Jacek Czarnecki, New Technologies Practice, Wardyński & Partners